Euro misbehaves as ECB introduces a raft of stimulus

13 Sep 2019

Raft of measures

Yesterday’s ECB decision was the most widely anticipated of this year, with market expectations for an easing package having built over recent months. In the end the ECB delivered a raft of measures which included a rate cut, QE, strengthened guidance, adjustments to TLTRO-III pricing and a tiering of the deposit rate. As was very widely expected and perhaps the most uncontentious of the policy measures the ECB cut the deposit rate by 10bps to -0.50%. The other key ECB interest rates remained unchanged at 0.00% (main refinancing rate) and 0.25% (marginal lending rate).

Open ended

The main uncertainty for markets leading into the decision was around QE, particularly in light of the opposition from certain Governing Council (GC) members in recent weeks. In what appears to be a compromise (between the doves & hawks on the GC) the ECB announced a restart of QE, with a purchase pace of €20bn/month starting 1 November. However one notable departure from previous rounds of QE is that this tranche will be open-ended and effectively tied to the ECB’s reinforced guidance (see below). All the ECB’s previous QE episodes included a defined end date.

Next hike 2023

If ECB guidance is taken on face value that QE would end shortly before the first rise in rates. Then, illustratively given the forward curve, which does not convincingly begin to price in a rate hike until 2023, it suggests that QE could continue until 2022. There was however an overtly strong nudge to governments to pick up some of the stimulus baton, with Mr Draghi stating that there was unanimity amongst the GC that fiscal policy should be the main policy tool. Indeed we would note that recent weeks have witnessed increased talk of the possibility of fiscal stimulus, with German Finance Minister Olaf Scholz stating that ‘we have, to respond with many, many billions, if indeed an economic crisis erupts in Germany and Europe’.

Euro reverses sharply

As much as Mr. Draghi might say that the ECB stands ready to increase stimulus if and when needed, it appears that the market now seems to think that this vociferous nod to sovereign’s taking over the baton of (fiscal) stimulus may just have been a veiled threat of “this is it, we’re (ECB) done, we’re out of ammo”. This may be partly be behind the somewhat perplexing move in the euro post the ECB announcement: The benchmark EUR/USD rate was sliding nicely as the raft of measures were being announced only to turn sharply higher and open (this morning) nearly 200 points higher than the 2 yearly low of yesterday afternoon.

Irish Economy: NTMA sells 10-year bonds at negative yield

The national debt agency yesterday tapped its May 2029 bond, issuing an additional €1bn of debt at a yield of -5.1bps – the first time debt of this maturity has been sold at a negative yield – and marking somewhat of a milestone for the country’s public finances given the remarkable journey over the past decade.
The last issue of this bond in mid-July was at a (positive) yield of 13.6bps and the NTMA has benefitted from a continued grind tighter in yields since then. The bid-to-cover ratio was 2.0 times. The NTMA has now issued €12.25bn of benchmark bonds this year, within reaching distance of its €14-18bn full-year target.

Economic releases

EU 13.30 Retail Sales
EU 15.00 Michigan consumer sentiment