European and US bonds parted ways yesterday, driven by a different ‘domestic’ narrative. After cautious positioning ahead of the ECB decision, European bonds outperformed as the ECB put money on the table to reinforce its commitment to prevent an unwarranted tightening of monetary conditions. The ECB left policy rates unchanged. Bond buying under the €1.85 trillion PEPP will continue at least through Mach 2022, but ECB will significantly step up the pace of bond purchases next quarter to prevent higher interest rates to cause an unwarranted tightening. The ECB didn’t give any concrete amount. Financial conditions will be assessed on a range of parameters and on the inflation outlook. The ECB 2021/23 growth projections hardly changed. 2021 inflation was upwardly revised to 1.5% from 1.0%, but in Lagarde’s assessment this uptick was still mostly seen temporary. The 2023 inflation forecast was left unchanged at 1.4% well below the 2.0% target. The ECB also repeated to keep an eye at the euro valuation. The ECB stepping up the pace of bond buying caused a modest decline in European yields. German yields eased up to 2.1 bp for the 10-y tenor. 10-y intra-EMU spreads narrowed 4/5 bp for peripheral countries. The story for US bond markets was different. The combination of good labour market data, the approval of the $1.9 trillion stimulus bill and the Biden administration frontrunning on its targets for vaccinations helped LT US yields to reverse an initial decline. The 30-y Treasury auction was well accepted, but didn’t change the course of events. At the close, 10 & 30-y yields rose 1.9 bp and 5.7 bp respectively. Orderly developments on the bond markets and approval of the stimulus plan triggered broad-based US equity gains between 0.58% (Dow) and 2.52% (Nasdaq). The S&P and the Dow touched a new record. The dollar didn’t profit from the widening interest rate differential. On the contrary, the risk-on caused broad USD-losses. EUR/USD finished at 1.1986. Even USD/JPY again didn’t profit from the risk-on (close 108.51). Sterling was little affected by the global trends. EUR/GBP held a tight range in the 0.858 /50 area.
This morning, Asian equities mostly show solid gains, with China underperforming. US equity futures are trading mixed. US yields are again trending higher. The dollar regains part of yesterday’s setback. EUR/USD returned to the 1.1950 area. USD/JPY also regains traction (108.85).
Today’s US PPI data gradually might get some more attention as a pointer for future inflation. Headline PPI is expected to rise from 2.0% to 2.7%. Consumer confidence of the U. of Michigan is expected to improve from 76.8 to 78.5. Despite recent pause, the US 10-y yield (1.58%) is still close to recent top, suggesting that the uptrend remains intact. ECB bond buying might slow the uptrend of EMU bond yields, but for now the -0.34%/-0.38 support for the German 10-y yield remains intact. EUR/USD yesterday succeded quite a nice rebound, but this morning’s price action suggests that a weekly close above 1.1952 still isn’t evident. The picture remains fragile. EUR/GBP is holding at tight range between north of 0.8541 2021 low. UK production data published this morning disappointed.
The Bank of Japan is mulling to scrap its 6tn yen annual target for buying stock funds, a Japanese newspaper reported. The idea is being foated as the BoJ is reconsidering its stimulus framework to make it more durable over the long term. The central bank would keep the 12tn yen ceiling on ETF buying however, to signal it is committed to provide enough stimulus. Earlier this week, people familiar with the review process said the BoJ is also considering to stop communicating bond buying plans ahead of the actual purchases to allow Japanese rates to move more freely.
During his first televised primetime address to the nation, president Biden voiced optimism about the country’s ability to tame the coronavirus. He directed states to make all US adults eligible for vaccinations by May 1 and said set the July 4 Independence Day holiday as a target for a return to some normality. His remarks came on the 50th day of his presidency, the official one-year anniversary of the pandemic and hours after he signed the $1900 stimulus bill.
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