Analysts at ANZ explained that despite the ECB turning more hawkish on policy, markets interpreted the statement as dovish.
Key Quotes:
“The EUR depreciated against all G10, bolstering USD strength. European yields fell across the curve, while the US curve flattened further with 2-year yields flat and 10-year down 2.8bps at the time of writing. The ECB’s interest rate guidance gave European equities a shot in the arm, with Euro Stoxx up 1.4% and other major bourses up 0.8-1.7%. US stocks were more mixed on heavier volumes. The DJIA was down 0.1% and the S&P up 0.2%. The VIX fell to 12.2, down 7%. Oil prices were biased lower after Saudi Arabia’s oil minister said a gradual lift in OPEC output is “inevitable”.
THE END OF AN ERA (ALMOST):
“The ECB has laid the foundations to begin normalisation next year, but the process will be very gradual given below-target inflation and current geopolitical uncertainties. Subject to data flow, the ECB will cut QE in half to EUR15bn from the start of Q4 this year and will end it by December 2018. Interest rates are expected to stay at current levels at least through to mid-2019. The ECB’s outlook for solid underlying growth momentum and building inflation remains intact.”
“The interest rate guidance leaves rates on hold through the EU parliamentary elections next May. This is not the first time that policy guidance has covered an election cycle, but that could just be coincidence. The dovish response by markets focused on the rise in geopolitical uncertainties, the downward revision to the 2018 GDP forecast (2.1% vs 2.4%), the ECB’s optionality on policy, and that the ECB is on hold for a year while the Fed is expected to continue tightening.”
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