Prior Week Summary
Mario Draghi announced an aggressive round of additional stimulus to further ease monetary policy in the euro-zone last week, with the caveat that he did not expect rates to fall further. The European Central Bank reduced the rate on overnight cash held by banks by an additional 10 basis points to a level of negative 0.4% while simultaneously lowering the benchmark rate to 0%. The central bank also increased the amount of bond purchases to 80 billion euros from 60 billion a month, and has included corporate bonds as eligible securities. Importantly, the ECB stated that it “expects key interest rates to remain at present or lower levels for a long period of time and well past the horizon of our net asset purchases. Mr. Draghi continued to say that “based on the current view, we don’t anticipate it will be necessary to reduce rates further.” Following the announcement, the euro climbed to a high of 1.12 relative to the dollar, after hitting a low of nearly 1.08 in volatile intraday trading.
The ECB has set the stage for a very active week, as many of the world’s largest central banks are set to meet. As of this writing, the market is placing very low odds on the probability that the Fed will raise rates this week, with Fed Funds Futures currently placing roughly 4% odds for a hike. While financial conditions have improved in the U.S. since the last Fed meeting, negative yielding sovereign bonds across the globe are putting increasingly greater pressure on domestic government bond yields. Not surprisingly, the average forecast for the year end value of the 10-year Treasury yield provided by professional economists surveyed by Bloomberg has fallen nearly 50 basis points since year end.
The Look Forward
There is an extremely active data calendar this week, led by the FOMC meeting on Wednesday. Also, the Bank of Japan holds a rate-setting meeting on Tuesday and the Bank of England’s MPC meets on Thursday.