Markets
The European Central Bank reconfirmed its very accommodative monetary policy stance. The central bank expects purchases under the Pandemic Emergency Purchase Programme over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year. Weekly purchases since the March meeting in effect most of the time exceeded €20bn in contrast to Q1. ECB President Lagarde added that the pace remains data dependent and that phasing out PEPP wasn’t discussed today. New growth and inflation forecasts will be interesting in June and could trigger changes within PEPP. Several individual governors already hinted at slowing them against the background of accelerating growth. Should downside risks arise, the ECB holds the necessary flexibility with a view to preventing a tightening of financing conditions that it inconsistent with countering the downward impact of the projected path of inflation.
According to the ECB’s economic analysis, the euro zone economic activity may have contracted again in Q1. Looking ahead, the progress with vaccination campaigns, which should allow for a gradual relaxation of containment measures, should pave the way for a firm rebound in economic activity in the course of 2021. Short term risks continue to be on the downside, but medium risks become more balanced. Headline inflation is likely to increase further in coming months but temporary factors responsible should fade out early next year. Once the impact of the pandemic fades, the unwinding of the high level of slack, supported by accommodative fiscal and monetary policies, will contribute to a gradual increase in inflation over the medium term.
The market reaction to the ECB’s message was very muted. That shouldn’t really surprise given the overall steady state of monetary policy. We retain some slightly more positive wordings regarding the economic outlook and surrounding risks. EUR/USD traded in a very narrow 1.2020 to 1.2060 trading range so far. As the US session gets going, the greenback is starting to gain some momentum. It could have to do with the slightly disappointing US stock market opening (up to -0.5% compared to >0.5% gains for Europe). Sterling underperforms amongst FX majors with EUR/GBP currently changing hands around 0.8680 from an open near 0.8640. The US yield curve flattened with daily changes varying between +0.4 bps (2-yr) and -1.4 bps (30-yr). The German yield curve bull flattens with yields shedding up to 2.1 bps (30-yr). 10-yr yield spreads vs Germany narrow by up to 3 bps (Italy).
News Headlines
UK business optimism according to the CBI quarterly trends survey improved sharply to 38 in April, from -22 in January, reaching the highest level since 1973. All subindices (including employment, new orders, output and domestic prices) improved both for the measure of the past three months and the next three months. Monthly CBI order data showed a slight decline from -5 in March to -8 in April. However, the monthly series also indicated further progress in expectations for output (36 from 30, highest since March 2017) and selling prices (27 from 20, the highest level since January 2018) over the next three months.
Belgian consumer confidence as measured by the Consumer inquiry of the Belgian National Bank eased slightly in April from -4 to -6. Belgian consumers become slightly less optimistic on the economic situation in the country and the prospects for unemployment over the next 12 months. At the same time, consumers grew more optimistic on their ability to save, with the indicator reaching the highest level since December. Despite this month’s setback, the NBB indicated the level of the confidence indicator remains close to the levels from before the crisis.
