It’s been a relatively calm start to trading on Thursday, as we wait for the latest monetary policy announcement from the ECB and, more importantly, the statement and press conference that accompanies it.
It’s not uncommon for markets to be a little quieter in the lead up to major central bank decisions, even those that don’t promise to be overly eventful. The ECB extended its bond buying program at the start of the year at a rate of €30 billion per month, with the expiry now pushed back to September this year. It’s so far kept its cards close to its chest regarding how it will handle the next taper, but many anticipate it will either end altogether in September or be extended to the end of the year at a reduced rate. Either way, the end of QE is near.
Which of these it opts for, assuming the speculation is accurate, is quite irrelevant, investors are more interested in how long after we can expect the first interest rate hike, with some pencilling one in next year. Anyone hoping to extract this kind of information from the ECB and its President Mario Draghi though will likely be disappointed. Instead, all we’re likely to get today is a slight change in the language, with the possible removal of a willingness to increase the asset purchase program in size or duration if the outlook becomes less favourable.
While this may not seem like much, it is the gradual shift in policy stance that policy makers have been alluding to that will signal the end of QE later this year and is indicative of a central bank that is becoming less dovish and more optimistic on the economy. While the recovery remains fragile, the euro area economy is performing well and we are seeing what looks like a sustainable improvement. If that starts to filter through into higher inflation as labour market slack diminishes, it may force the ECB to consider rate hikes earlier than is currently expected.
ECB aside there isn’t too much on the radar on Thursday. We’ll hear from two Bank of Canada officials, including Governor Stephen Poloz, while US jobless claims are the only notable release on the data side. Traders may have one eye on the US jobs report on Friday, with the Federal Reserve now considering additional rate hikes on the back of tax reform providing additional stimulus in an already strong economy.
