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Market Update

European Central Bank keeps stimulus torch lit as U.S. officials consider dimming the flame

July 26, 2021


Continued upward pressure on prices in the United States remains the economic theme as the Fed signaled more appetite for gradually reducing their bond buying program. This is in contrast with the European Central Bank’s continued economic stimulus.

Economic update

While the home-buying frenzy settled slightly from earlier this year, median home prices continue to reach record highs, reaching $363,300 in June. This represents a 23.4% year-over-year price increase. Separately, labor market figures showed that the number of individuals receiving jobless benefits dropped to the lowest level since early in the pandemic. Meanwhile, initial jobless claims rose slightly for the week ending July 17. Economists suggest the moderate change could simply be due to seasonal adjustments in the data, which typically occur in July.

Foreign currency

The European Central Bank indicated its plan to keep interest rates low, citing continued concerns over COVID-19 and the impact of new social restrictions on the region’s tourism industry.

ECB President Christine Lagarde said at a news conference on Thursday that, “The Delta variant of the coronavirus could dampen the recovery in services, especially in tourism and hospitality.” The Central Bank released an official statement saying it won’t increase interest rates (currently set at negative .05%) until inflation moves much closer to 2%. The Bank added they are willing to let inflation run high for a period of time if that is what’s needed to reach their stated target.

Per reporting done by the Wall Street Journal, this suggests that Europe’s Central Bank won’t increase interest rates until 2024 or 2025. This would be a decade after Europe’s key interest rate was first cut to below zero.

As a comparison to the projected U.S. growth rate of 7%, the Eurozone economy is expected to grow by about 4.5% this year. Corporates may continue to find it advantageous to synthetically convert their USD debt to EUR by executing a cross-currency swap given the persistent negative rate environment in Europe. In certain rate environments, firms can reduce their interest expense by taking advantage of this strategy.

(Related insight: Watch the on-demand webinar, “Semiannual Market Update for Corporations” with Amol Dhargalkar and Kevin Jones)

These policy decisions clearly contrast with recent news from the Federal Reserve, whose top officials meet next week with plans to discuss if the time is right to start phasing out their bond purchasing program (i.e. tapering).

Fed Chair Jerome Powell has been quoted saying their discussions will be focused on two key questions — first, when to start reducing their bond buying program and, second, how quickly to reduce those purchases. The Fed’s balance sheet sharply rose over the past year in response to concerns over the economic impacts of the pandemic. Another key indication coming out of the Fed is that interest rates are not likely to move from zero until tapering is complete. Corporates considering debt issuances should keep track of how the Fed progresses as tapering could introduce uncertainty into the interest rate market.


Strained supply chains and unmet demand continue to pressure commodity prices. Natural events have not been any kinder this year either. An early and intense fire season in the Western U.S. and Canada placed additional strains on lumber supplies, just as prices were beginning to fall. Similarly, the heat and drought conditions in the West pushed natural-gas prices to their highest level in seven years.

Looking Ahead

The Case-Shiller home price index will come out on Tuesday as well as new consumer confidence figures. Fed Chairman Jerome Powell is scheduled for a press conference on Wednesday, which will give additional insight into the Fed’s much anticipated meeting next week.

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