ECB, Bank Of Canada, And The Peak In US CPI Base Effect

The media has played up the upcoming ECB meeting with all the turbulence that can be mustered. However, investors and other market participants seem considerably less anxious. And for a good reason: at the end of the day, it does not really matter that much.

Since the ECB stepped up its bond purchases, the euro, yields, and premiums over Germany have risen. But, of course, there are other drivers of the capital markets, and that is the point. Even though the euro is often quoted to the hundredth cent, the $6.6 trillion-a-day average turnover is not so exacting that what turns out to be a few billion euros of bond-buying a week makes much of a difference. The same general argument applies to the bond market, as well.

The more important issue that has yet to be fully recognized is that the ECB's Pandemic Emergency Purchase Program is currently set to expire at the end of March 2022. Assuming the Federal Reserve begins to taper in Q4 21, it will probably still be buying as PEPP closes.

Of course, the ECB could extend the program, but the macro backdrop might make it politically difficult. First, the EU's fiscal initiative will most likely have begun distributing funds, providing added stimulus. Second, the OECD's largest forecasts anticipate eurozone growth to exceed US growth in 2022, 4.4% to 3.6%. Bloomberg's survey of private-sector economists shows an EMU beat of 4.2% to 4.0%.

The modest rise in European interest rates here in Q2 has been accompanied by macroeconomic data that have mostly surprised on the upside and an acceleration of the vaccination efforts. The 10-year Bund yield and the 10-year breakeven have risen by about eight basis points since the end of Q1. The EU plans on lifting quarantine rules for vaccinated people as of the beginning of next month. The recovery is gaining traction, and confidence in it is rising. Europe's Dow Jones Stoxx 600 is at record highs, with a nearly 13.5% gain year-to-date, a little more than the S&P 500 (~12.5%).

As the economic news stream has improved, the political challenges are intensifying. No, this is not about the next French election. Consternation has been expressed in some quarters that Le Pen is running ahead of Macron, but this is even more turbulence. The election is 10 months away, and the vaccination program and economic re-opening can be expected to strengthen Macron's standing.

More importantly, we have seen this before. Le Pen's solid base helps when there are many candidates. In a run-off final round, Le Pen loses. The German election is closer, and we can confidently say that Merkel's successor will be elected. The latest polls show the CDU is back ahead. The Greens are in a close second. The SPD is likely to be relegated to third place. The bookmakers and political punters on Predict.Org favor CDU's Laschet over the Green's Baerbock as the next chancellor.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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