The ECB held its latest policy meeting last Thursday, and left the deposit rate and the current bond-buying program unchanged. However, in his post-meeting press conference, bank president Mario Draghi said that policy would have to be reviewed in March and that downside risks had increased. Additionally, he noted that there are “no limits” to how far the ECB will go to defend its inflation target. The market interpreted these as obvious hints about the coming expansion of accommodation at the next meeting in March, which will also come with updated growth and inflation forecasts from the central bank’s research team. Risk assets, in the perverse fashion we have become accustomed to over the last several years, rallied on the news of further stimulus. Oil gained between 9 and 10% to end the week above $32, while the S&P 500 rallied Thursday and Friday to post its first positive week of the year, up 1.4%. That said, oil is still down significantly YTD (about 15%), and the S&P is down just under 7% on the year. German Bunds also rose in price on Draghi’s comments, along with other Euro-area sovereign debt, and yields for 10-year bunds touched levels last seen prior to the market’s disappointed reaction to the ECB’s QE announcement in early December. While the ECB stimulus has unquestionably had a positive effect, staving off recession and deflation, it has yet to materially increase growth or inflation in the region, despite the other combined factors of a lower currency and cheaper energy costs for corporations and consumers. It is unlikely that Euro rates will move appreciably higher in this environment, thus lending support to the U.S. Treasury market where rates look downright cheap in comparison.
Source: Barron’s, Bloomberg, Reuters