Markets
The ECB left key policy parameters unchanged. The deposit rate remains at a negative -0.5%. APP runs at a €20bn pace/month. Net bond buying under PEPP will continue until March 2022 while maturing securities will be rolled-over at least until end 2023. The ECB has repeatedly said they could scale up PEPP in time and size. In today’s statement however, the ECB also (formally) highlighted the possibility PEPP would not be used in full if favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon. The latter caused core and peripheral bond yields to spike in the leadup to the press conference despite the fact this is not entirely new to markets. Lagarde mentioned it already in previous meetings. Additionally, based on the current bond buying pace, the ECB would in fact have to (unnecessarily) raise the pace of purchases for the envelope to be exhausted by March next year. Short-term risks to growth and inflation are still tilted to the downside (extended lockdowns, coronavirus variants). They are less pronounced however in light of the upcoming vaccination campaign, the treat of a no-deal Brexit being removed and the impasse around the EU Next Gen recovery fund resolved. Overall, the latest economic developments are still in line with the December baseline. Lagarde dodged the question about (peripheral) yield curve control (suggested by a Bloomberg report earlier this week) and the recent political turmoil in Italy, mentioning several times the goal is to preserve favourable financing conditions across the euro zone. To that extent, the ECB looks at a range of indicators rather than a specific bond yield. A cautiously optimistic assessment made sure that most of the pre-press conference bond yield gains lasted even as Lagarde downplayed the possibility of PEPP not being completely exhausted. Germany’s yield curve steepens with yield up 2 bps (5-yr) to 3.7 bps (30-yr). Peripheral yields inch a few bps higher but spreads are mostly unchanged. US yield gains are similar in size, helped higher by stronger data (jobless claims, housing data, Philly Fed outlook).
The euro was better bid thanks to interest rate support in the wake of the ECB policy statement – that in contrast to December didn’t mention the ECB monitoring the euro exchange rate today. Lagarde did say it’s on the watchlist when asked about it but it went without any profound market impact. Unlike bond yields, EUR/USD failed to hold on to the ECB gains that propelled the pair to an intraday high beyond 1.217. At around 1.214, the combination is still up for the day (from 1.2106). Sterling closed yesterday at key support near EUR/GBP 0.8865 and forced another attempt during European dealings for a break lower. At the time of writing, the pair is trading sub 0.886(5) but we’ll have to await tomorrow’s (UK) retail sales and (UK and EMU) PMIs for a sustained break going into the weekend.
News Headlines
The Turkish central bank kept its main policy rate unchanged at 17%, ending consecutive rate hikes under new governor Agbal. The MPC decided to maintain decisively the tight monetary policy stance for an extended period until strong indicators point to a permanent fall in inflation and price stability. If needed, additional tightening will be delivered first. The CRBT is aware that the tight(er) stance fosters macroeconomic and financial stability by facilitating amongst others a lower credit risk premium and a stabilization of TRY. The lira slightly strengthened after the meeting with EUR/TRY staying below 9 and ready to test 8.89 support.
The Norges Bank kept its policy rate unchanged at 0%. It will most likely remain at that level for some time ahead. A first rate hike will likely come early 2022. Economic developments have been broadly in line with the projections made in December. Higher infection rates and stricter containment measures balance an effective vaccination process. Underlying inflation is above the target, but the krone appreciation since March and prospects for low wage growth suggest that it will moderate ahead. EUR/NOK set a minor new cycle low around 10.25.
