Earlier this week, the ECB’s Benoit Coeure pulled a Janet Yellen and told a non-public audience of hedge funds that because markets are usually less liquid in the July-August “lull”, the central bank would be “slightly” front-loading PSPP purchases in May and June. This bit of very material, very non-public information promptly triggered a quick move lower in the EURUSD before things calmed down. Some ten hours later, the ECB was kind enough to share that information with the public which of course precipitated a 150 pip EURUSD plunge prompting us to ask just how many other mysterious market moves can be explained by “Chatham House rule” meetings heald by The ECB each day/week/month?
The ECB’s move to front-load asset purchases effectively means that QE will be expanded in months when net supply is positive and tapered when negative, which underscores a feature of PSPP that sets it apart from QE in the US and Japan: Mario Draghi is buying at a time when European governments have been cornered into an austerity fixation by the troika, meaning in many cases, monthly asset purchase targets will be difficult to hit owing lackluster supply.Â
This of course highlights something rather absurd about the ECB’s asset purchase program specifically, and about Brussels’ stance on fiscal discipline more generally. Namely, there’s something quite contradictory about telling governments to tighten their belts while promising to buy any and every piece of paper their treasury departments care to issue. In fact, it’s probably fair to say that a €1.1 trillion QE program simply cannot peacefully coexist with a strict, currency bloc-wide austerity policy.
This glaring contraction was on full display at the ECB’s April 14-15 policy meeting, minutes show.
Here’s more via the ECB:
Since the Governing Council’s previous monetary policy meeting on 4-5 March 2015, the implementation of the ECB’s expanded asset purchase programme (APP) had had a significant impact on euro area financial markets, contributing to further declines in government bond yields, while higher levels of excess liquidity had put downward pressure on euro money market rates. The euro had continued to depreciate against the US dollar, reaching a low of USD 1.05 per euro.
Since the start of purchases under the public sector purchase programme (PSPP) on 9 March, sovereign bond yields had declined further, reaching new historical lows in almost all euro area jurisdictions, the impact being strongest at the longer end of the yield curve. However, over the course of the month, yields in some jurisdictions had partly reversed the earlier declines that had immediately followed the start of the programme. Yield curves had remained lower and flatter than on 4 March, i.e. just before the announcement of the details on PSPP implementation. The downward shift was even more apparent when comparing prevailing yield curves with those observed immediately before the announcement of the APP on 22 January.
