- Fink 🧠
- Posts
- ECB - WE ARE NOT HERE TO CONTROL THE YIELDS...
ECB - WE ARE NOT HERE TO CONTROL THE YIELDS...
Not much in the way of big overnight news...
Chinese indices rallied, U.S. futures were in the green, the Nasdaq led the way and the yen weakened further...
07:30 GMT snapshot
Main events today are the ECB meeting and the weekly claims & JOLTS data from the U.S.
There's also the 30Y auction, although the 10Y passed without too much incident so I guess everyone will stop caring about bond auctions again.
ECB
Setting the scene...
(ABN Amro 5th March 2021)
Rising bond yields across the EU had a few officials running scared...
Favourable financing conditions were under threat, and there was even a hint of panic from Stournaras.
The Bloomberg sources quoting officials box seems most accurate...
When all is said and done financial conditions haven't tightened all that much
Finally, corporate bonds and stock markets are still behaving well. Using a simple synthetic index, Financial Conditions Index haven't tightened much. No panic, but no complacency either if the ECB wants to preserve the (December?) constellation of financial conditions
And maintaining loose financial conditions will be the crux of today's meeting...
Nothing has excessively changed (taking a broad perspective) but the speed of the rise in yields has led to hyper-vigilance and an awareness that things could change...
The ECB will want to push back against further increases in long-end yields and the press conference questions will probably focus on this point.
Even if the ECB cannot stop yields from rising further, they will want to slow the pace of the rise...
The ING base case looks spot on:
In a separate note ING mention inaction sending a tough signal to the market
INACTION
A failure to react after the verbal intervention of the past few weeks would be understood as a sign that the rise in yields is warranted by economic conditions.
It would leave bonds free to sell off further, adding roughly 10bp to our already bearish forecasts in Q1.
The endpoint for this year would be unchanged in our opinion.
ACTION
A prolonged effort would be to increase the pace of purchases to €110bn until, say, the end of September, by which time eurozone countries have a fighting chance to have developed herd immunity.
Here the impact would be more significant, in the 20bp area compared to our baseline forecast.
However, as this would merely be a front-loading of purchases, we expect the impact to fade entirely by the end of the year.
Action opens another can of worms in my view, as it would lead to talk of either a PEPP extension, or a tapering of purchases towards the end of the program...
If the ECB were to act now - what kind of message does it send to the market?
Panic over a moderate increase in bond yields and formal changes to the program would surely imply deeper hidden fragility...
Words vs Actions
There have been limited signs of PEPP purchases increasing so far as this chart from Nordea shows...
Pictet's Frederik Ducrozet
“It is only fair to expect the Executive Board to walk the talk by temporarily increasing the pace of PEPP purchases,”
Ultimately this is where I expect things to end up.
Very little in the way of formal policy action, but a temporary increase in purchases within the flexibility of the PEPP envelope to remind the market that they are willing to do 'whatever it takes' when necessary (and the bare minimum the rest of the time) rather than just talk...
The euro at current levels will be of little concern, and the updated economic forecasts will also be released.
The consensus is for a downward revision of the growth forecasts for 2021, with more of the recovery/growth pushed into 2022 plus a slight upward revision of the inflation forecasts for 2021 and 2022.
Recommended for the press conference...
(Another) Quick Inflation Point...
Absolutely not a dig at ForexLive - they're just reporting the comments.
These came in the form of a twitter thread 👇
Today’s #CPI report reinforces an environment of more stable, but not excessive, #inflation. We’re witnessing the end of a period of #disinflation in many places, and the re-rating of growth and #prices to impressively higher levels.— Rick Rieder (@RickRieder) March 10, 2021
So, while we don’t expect the #Fed to make a policy adjustment anytime soon, at some point the #financial stability #risks that emanate from an extremely low policy rate, coupled with the real #economy boom that we expect, could in fact force the Fed’s hand.— Rick Rieder (@RickRieder) March 10, 2021
Isn't this exactly what the Fed expect, now that they have shifted to outcome-based guidance?
And we've kicked off quite the debate over here...
Stimulus plan has passed - Biden To Become Hero or Zero
Because there's literally nothing in between...
This could/should end up being far more defining for his presidency 👇
SCOOP Emerging details @JoeBiden infrastructure plan via @LJMoynihan: Could be as high as $2.5 trillion over 4 years; some public-private partnerships that could leverage government spending. Details will start to leak in coming days as Biden finishes w the passage of stimulus— Charles Gasparino (@CGasparino) March 10, 2021
Review of yesterday's 10Y auction
🇺🇸10-year Treasury bond auction finds average demand but modest tail
via John Canavan @OxfordEconomics https://t.co/s9PLn0Cer1 pic.twitter.com/XDRrErc0AV— Gregory Daco (@GregDaco) March 10, 2021
Fed Watch - THE BIG QUESTION
Can markets trust the Fed?
We have the answer... 💪
Never knew I needed this in my life till now, but behold the three most based and most recent Fed chairs: pic.twitter.com/vw3pOoPCbF— Trevor Chow (@tmychow) March 10, 2021