Comments on ECB meeting and global fixed income themes from BlackRock

The European Central Bank (ECB) kept its monetary policy stance unchanged yesterday, maintaining the deposit rate at -0.4%, the main refinancing rate at 0.0%, the marginal lending facility at 0.25% and the size of its QE programme at €60 billion per month.

President Draghi struck a positive tone in the press conference regarding GDP growth and improvements in economic activity across countries and sectors in the euro area. The ECB’s forecast for GDP growth in 2017 has been revised up. However, as is now very familiar, he referenced weakness in underlying inflation as being a key issue for any future change to policy and the ECB’s inflation expectations have been revised down for next year and 2019.

Several questions in the press conference related to future tapering of the ECB’s asset purchase programme. Draghi commented that discussions had taken place within the Governing Council around scenarios concerning the length and size of monthly flows but that any decision will be made in October. He reiterated that sequencing was not discussed and they stand by their comments in the prepared statement that interest rates are expected to stay at current levels “well past the horizon of the net asset purchases”.

The strength of the euro, which has appreciated from 1.05 versus the US dollar at the end of 2016 to 1.20 today1, was the source of many questions. It is notable that Draghi commented on the strength and volatility of the currency as being a source of risk.

Given the currency bloc’s improving fundamental backdrop and recent impressive data releases, particularly in Germany, not to mention the shortage of supply of bonds to buy, we believe that the ECB will fully taper its asset purchase programme by the end of 2018.

In terms of positioning in the Eurozone, we are long EURUSD, remain short French government bonds but have added German duration on technicals and valuations. We also retain our exposure to Italian inflation-linked bonds.

Elsewhere in Europe, the Riksbank kept the repo rate unchanged at -0.5% today. We remain long SEK and are short Swedish duration.
The Bank of Canada surprised many investors yesterday with another 0.25% increase in interest rates, taking them to 1%. Stronger economic data prompted the move, with robust employment and wage growth particularly pivotal. Meanwhile in the US, our core view is that the US Federal Reserve will provide further details this month for changes to its reinvestment policy to commence balance sheet reduction.

In contrast, the central bank of Brazil (COPOM) the day beforeyesterday cut the SELIC rate by 1% to 9.25%, as expected. Other central banks to reduce interest rates in recent weeks also include Indonesia and Colombia, both citing lower inflation. We have a range of diversified positions in emerging market debt, including Indonesia, Argentina, Russia, China and India.

Marilyn Watson – Head of Global Fundamental Fixed Income Strategy – BlackRock