ECB In Focus, While Australia Pokes The Panda


It is not so much the ECB meeting that attracts attention today, as no one expects it to do anything.  Instead, it is President Lagarde's press conference that is the key focus.  There are two broad interests.  The first may be more about tone than content, but the issue is whether, despite the contagion wave, officials are more confident about the economic outlook.  The composite PMI moved back above the 50 boom/bust level in March for the first time since last September. The preliminary April report, due tomorrow, is expected to have stayed above it (even if not quite as high as the 53.2 reading in March, which beat all of last year's but the jump last July to 54.9).

The second key issue is about the ECB's bond purchases. Lagarde indicated in March that the executive board approved significantly increasing, but the weekly numbers arguably do not show much of an increase.  It had been buying around 14 bln euros of bonds a week under its Pandemic Emergency Purchase Progam, and now it appears to be closer to 17 bln a week.   At the same time, it should quickly be added, the dramatic rise in yields has abated.  Since the ECB met on March 11, the US 10-year yield is up less than two basis points, while the yield on the German Bund has risen seven basis points and the Italian BTP yield is 15 bp higher.  The hawks at the ECB are keeping the purchases on a tight leash, and the approval will be reviewed at the next ECB meeting (June 10).  Unlike the Federal Reserve that is committed to buying a fixed amount of Treasury and Agency bonds every month ($80 bln and $40 bln, respectively), the Eurosystem has maximum flexibility.  It draws on "envelope," which is the maximum that can be purchased through next March unless the executive board decides more is required.  

Of the last ten days that the ECB met, the euro has risen half the time.  If there has been a recent pattern, it may be sawtooth.  Beginning with the meeting last June, the euro has alternated between rising and falling on ECB meeting days.  That would seem to place importance on how the euro traded on March 11, when the ECB last met, and agreed to accelerate its bond purchases.  According to Bloomberg data, the euro rose by nearly 0.5%.  

Germany's constitutional court is allowing the ratification process of the EU's Recovery Fund to go forward.  Since both chambers of parliament have approved it, all that is left is President Steinmeier's signature.  The court said that it could not hold up the process given that the plaintiffs did not demonstrate that it was "highly likely" that the Recovery Fund would be found unconstitutional.  The court also said that it would seek guidance from the EU high court.  Some tried to link the decision to a small uptick in Italian bonds, but it seems to be a stretch.  Italian bonds were bid before the decision and roughly halving the gains by the close, which was actually a touch lower than where it was trading before the ruling.   That still leaves nine EU members to approve the measures.  It was hoped to be finalized by the end of the month, but this looks increasingly unlikely.  Poland may be the next obstacle.  A junior coalition member is balking, and it may take another month or more to sort it out. 

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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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