Markets
The moderation on global interest rate markets initially continued this morning. Slightly softer yields also provided a fertile context for European equites to extend gains after WS yesterday and in China this morning. The dollar also fell prey to further profit taking. However, especially European investors soon turned more cautious going into the ECB policy decision. European yields were only marginally lower at the time of the ECB policy decision. Treasuries still maintained part of their earlier gain. The ECB as expected left its policy rate (-0.5% deposit rate) unchanged. The size of the PEPP pandemic asset purchase program also remains unchanged at €1,85 trillion and purchases will continue at least through March 2022. However, based on both its assessment of financing conditions and the inflation outlook, the ECB expects purchases under PEPP over the next quarter to be conducted at a significantly faster pace than during the first months of this year. At the press conference, Lagarde reiterated that preserving favourable market conditions remains essential and that an unchecked rise in bond yields could lead to a premature tightening. Regarding the new economic forecasts, the ECB kept the its growth forecast broadly unchanged at 4% for 2021, (from 3.9%), at 4.1% for 2022 (from 4.2%) and at 2.1% for 2023. The 2021 inflation outlook was raised to 1.5% (from 1.0%), to 1.2% for 2022 (from 1.1%) and left unchanged for 2023 at 1.4%. However, most of the 2021 inflation rise is still seen as technical or temporary. The ECB president admitted despite current ongoing weakness due to the pandemic, the risks to the outlook have become more balanced. On a question on how much more assets the ECB will buy, the ECB president responded that the ECB will be watching the whole chain of transmission of financial conditions and also measure financial conditions against the inflation outlook. So no concrete amount. The ECB also will assess the pace of purchases in a quarterly perspective. Weekly data should not be overinterpreted. With respect to FX, the ECB will continue to monitor exchange rates for their impact on inflation.
After reversing an early decline in the run-up to the ECB decision, German yields again lost up to 3-4 bp as the ECB announced to raise the pace of assets purchases. The German 10-y retested the -0.34%/-0.38% support, but no sustained break occurred yet. German yields are currently declining between 0.6 bp (2-y) -2.5 bp (10-y). 10-y intra-EMU government bond spread are  tightening upon the announcement with Italy outperforming (-6bp) and the likes of Spain, Greece, Portugal narrowing about 3 bp. US Treasuries underperform. The US weekly jobless claims also printed at a better than expected 712K. Even so, US yields preserve the recent calm, changing between -1.7 bp (5-y) and 3 bp (30-y) as markets are looking forward to this evening’s $24 bln sale of 30-y bonds. European equities hardly reacted to the ECB decision and maintain limited gains. US equities open strong with gains between 0.75% and 1.75% (Nasdaq). On the FX market, the dollar ceded ground on the positive global risk sentiment. The trade-weighted dollar DXY dropped to test the 91.60 support area. EUR/USD rebounded to the 1.1973 area, but returned part of its gain after the ECB’s step to preserve accommodative monetary conditions (1.1945). The ECB action again had hardly any impact on the EUR/GBP cross rate. The pair is holding a very tight range in the mid 0.85 area (currently 0.8560).
News Headlines
UK consumer spending started to pick up again after the plunge at the start of the year when the country went into lockdown for a third time. Debit and credit card purchases rose by 10 percentage points in the week ending March 4, Data from the Office for National Statistics showed. That is about 83% of the February 2020, the month before the first lockdown. Other ONS data showed 19% of employees remain on the government’s furlough scheme.
China confirmed it will meet with the US in Alaska next week. US Secretary of State Blinken and National Security Advisor Sullivan will meet their Chinese counterparts in the first in-person encounter since the Biden administration took office. US/Sino relations sunk deep under the Trump presidency. Biden however has signaled he also plans a tough stance towards Beijing.
