Markets
The European Central Bank eased its monetary policy further today in response to the pandemic-related downward revision to inflation over the projection horizon. The ECB raised the envelope for the pandemic emergency purchase programme (PEPP) by €600bn to a total of €1350bn while also extending the horizon of net purchases under the PEPP from at least the end of the year until at least the end of June 2021 and in any case until the central bank judges that the coronavirus crisis phase is over. Maturing principals payments form securities purchased under the PEPP will be reinvested until at least the end of 2022. Net asset purchases and reinvestments under APP and the ECB’s key interest rates, remained unchanged. The ECB does continue to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry. ECB President Lagarde presented a gloomy economic outlook in Q2. The economy is expected to rebound in Q3, but the recovery speed and scale remain highly uncertain, prompting the ECB to publish three different scenario’s. In the baseline scenario, the central bank now expects GDP to contract by 8.7% this year, before rebounding by 5.2% and 3.3% in 2021 and 2022 respectively. Risks to these baseline projections are tilted to the downside. Inflation projections also faced a significant downward revision compared to March projections. The ECB sees inflation at 0.3% this year, 0.8% next year and 1.3% in 2022 in its base scenario (from 1.1%-1.4%-1.6%). Inflation will remain depressed in the short run because of a combination of lower commodity prices, the serious drag on real GDP and the higher amount of economic slack by which it is accompanied. Upward price pressure coming from supply side constraints are overshadowed by the drag on growth. The ECB finally endorsed efforts made on a European level from a fiscal stimulus point of view. ECB Lagarde’s press conference didn’t bring much additional insight. She stumbled and stammered her way through the Q&A, notably failing to respond to whether they inserted the deflations risk as a response to the Karlsruhe ruling or to whether the PEPP portfolio could already be reduced ahead of the first rate hike, something which is possibly according to different forward guidances for PEPP (no wind down before end of 2022) and APP (no wind down before 1st rate hike). She was clearly restricted to reading out loud prepared remarks, on or mostly off the mark. The market reaction to the ECB’s easing was rather muted. Raising the PEPP envelope was by and large discounted. Both EUR/USD (1.1270 recovery high) and German yields hold on to the advantage made over the past sessions and even try to add to them. The German yield curve bear steepens with yields rising by 0.6 bps (2-yr) to 5.2 bps (30-yr). Peripheral yield spreads vs Germany narrow by 8/9 bps for Portugal/Spain and by 15/18 bps for Italy/Greece thanks to the extended presence of the ECB on the government bond market. The equity rally of the past two days stalled today.
News Headlines
Argentina’s foreign FX reserves continued to decline at a fast pace despite the government’s measures to tighten access to dollars. Central bank reserves tumbled almost $1bn last month and around triple that amount since January as it sought to support the waning peso. Remaining reserves now stands at $42.6bn, down from a peak at around $80 bn last year and the lowest level since 2017. USD/ARS gained more than 15% since the start of the year.
US jobless claims eased compared to the previous week but are still an enormous 1877k in the week ending May 30th despite people returning to their work as the economy gradually reopens. Continuing claims (ie ongoing unemployment) however ticked back up to 21487k in the week that ran to May 23 after the first (deep) decline since February the week before that.
