Markets:
The ECB recalibrated its monetary policy in view of the economic fallout from the resurgence of the pandemic. They didn’t touch on policy rates, but changed conditions of asset purchases and liquidity operations. The envelope of the Pandemic Emergency Purchase Programme (PEPP) is increased by €500bn to €1.85tn with net purchases to last at least until March2022 instead of June2021.With €700bn already spent by the end of November, this implies a monthly pace of €71bn PEPP/purchases if the ECB wants to use all available funds. That’s more or less the average pace of the past 5 months. The ECB will keep reinvesting maturing bonds under PEPP until at least the end of 2023. Previous guidance stated at least until the end of 2022. Net asset purchases under the longer-standing Asset Purchase Programme (APP) will continue to run at €20bn/month for as long as necessary. The ECB will conduct three additional three additional TLTRO III operations between June and December 2021, extending the period over which considerably more favourable funding terms will be applied. Counterparties will also be entitle to borrow more as a share of their stock of eligible loans (55% from 50%). Collateral easing measures, PELTRO’s and the Eurosystem repo facility for central banks (EUREP) and all temporary swap and repo lines with non EMU central bank will all also be extended to somewhere in 2022. The monetary policy measures taken will contribute to preserving favourable financing conditions over the pandemic period. The ECB holds an official easing bias given high uncertainty on the vaccine roll-out, the dynamics of the pandemic and the bumpy recovery ahead. The single currency is specifically mentioned with regard to the possible implication for the MT inflation outlook. Fresh growth forecasts show slower momentum next year GDP forecast to decline by 7.3% in 2020 (from -8% in September), before recovering by 3.9% in 2021 (from +5%), by 4.2% in 2022 (from +3.2%) and by 2.1% in 2023. Risks remain tilted to the downside, but are less pronounced. Inflation is expected to remain well below the 2% target trough 2023, gradually rising from 0.2% in 2020 to 1.4% in 2023.
The market reaction on the ECB decisions was telling. The single currency and European yields rose modestly with most of the stimulus discounted and markets aware that this could well be the ECB’s “last dance”, in spite of the easing bias. EUR/USD recaptured the 1.21 mark. German Bunds underperformed US Treasuries. The German yield curve bear flattens with yields adding 1.2 bps to 0.6 bps. The US yield curve bull flattens with yields shedding 0.7 bps to 1.6 bps despite tonight’s 30-yr Bond sale. 10-yr yield spreads vs Germany are almost unchanged. European stock markets correct around 1% lower. Sterling gets catapulted back above EUR/GBP 0.91 on a lack of brexit progress, testing EUR/GBP 0.9130 (62% retracement from September/November downleg).
News Headlines:
The EU today published a series of contingency measures/proposals to address the consequences of a no deal scenario. The measures address topics where there is no other international fallback solution and aim to limit disruptions in air traffic, road transport and rail traffic. Other proposals are to continue to offer reciprocal access to the fishing waters of the UK and the EU till the end of next year. Part of the proposals need approval of national governments, from the EU parliament and/or from the UK to become effective.
US first time weekly jobless claims jumped by 137 000 in week to December 05, to 853 000, the biggest rise since the first half of September. Markets expected only a marginally rise to around 725 000. The data gives further evidence of the new corona wave filtering into the labour market. November headline (0.2% M/M and 1.2% Y/Y) and core inflation (0.2% M/M and 1.6% Y/Y) printed slightly higher than expected. Amongst others, housing (0.3% ), transportation (0.3%) and recreation (0.4%) added to (modest) price rises.
