The European Central Bank disappointed markets with the latest monetary policy package announced by ECB president Mario Draghi. A Reuters surveys of economists prior to the announcement indicated most expecting an increase in the EUR60 billion monthly asset purchases, with a median forecast of €75 billion, while a deposit rate reduction to -0.35% was expected. While the money printing / quantitative easing was extended by six months to March 2017 and regional debt will be included, the monthly rate of purchases was not increased. And the deposit rate was ‘only’ reduced to -0.30%.
Since October, members of the ECB governing council had been hinting about more easing to come. Investors had bought eurozone bonds, sending yields lower, in anticipation of fresh actions from the ECB.
Lower bond yields in Germany had attracted buyers into U.S. Treasury debt which had pushed yields lower there, too. When the hoped-for measure failed to materialise (as much as the market wanted), the reaction was swift. Bond yields everywhere jumped; German 10 year bonds moved from 0.47% to 0.67%, the biggest daily rise in almost five years. Swiss and Scandinavian government bond yields also rose sharply. Mizuho strategist Peter Chatwell said, “The bond markets got massively carried away, so we were expecting this disappointment. I’m not convinced Bunds will recover significantly from here.” Matters weren’t helped by confusion stemming from a false tweet from the Financial Times (and the release of an internet story) just prior to the official announcement and which reported no change to the deposit rate. The jump in yields spread to the US and the 10 year yield rose 14bps to 2.32% – the largest one day sell off since July 2013 – while in the local market, the implied yield on 10 year bond futures rose 4bps to 2.87%.
Westpac said it thought the ECB will need to do more to maintain confidence and credit growth and bolster real economic activity but believed the ECB did not have plans for such. In their view, “the response of confidence amongst households, corporates and investors to this decision will be critical.”
The chart below shows exactly what the ECB is dealing with in trying to generate eurozone inflation with only Malta approaching ideal levels.
