The focus overnight was the ECB’s policy update. As many expected, the ECB dropped its easing bias, removing the pledge to increase the asset purchase programme if economic conditions deteriorate, a further step in the progression of communication to end the programme entirely.
However, in the press conference President Draghi, wary of adding further fuel to EUR, which had nudged up to a 3½-year high this week on a TWI basis, talked a dovish game. He downplayed the removal of the easing bias, indicated that inflation remained subdued and that policy would be “reactive not proactive”, and warned that trade protectionism presents a new downside risk.
Our view on the policy outlook remains unchanged, seeing the ECB making further communication tweaks in the months ahead, culminating in ending QE sometime between September and December, before moving to rate rises sometime in 2019.
Draghi’s dovish overtone saw European rates pulled down. Germany’s 10-year rate got to as high as 0.70% as the easing bias was dropped, but has since fallen away by 7bps to 0.63%. This has helped dragged down US Treasury yields, with the 10-year rate down to 2.85% around 3bps lower versus the NZ close.
Yesterday the DMO announced the syndication of a new NZ 2029 government bond, targeting $1.5-2.0 bln of issuance. 10-year swap-bond spreads were already trading at the lower end of their annual range in anticipation of the new issue, limiting any adverse reaction to the NZ 10-year government rate. Indeed, the move looked to be well anticipated, with the 10-year government rate falling by 2 bps to 2.99% against a flat swaps curve and some mild upward pressure to Australian rates.
There is quite a bit on the economic calendar in the day ahead. Looking at the key events, the BoJ is expected to keep policy settings unchanged. After the recent grilling in front of Parliament, it’s hard to see much fresh coming out of Governor Kuroda’s news conference.
Eyes then focus on tonight’s US payrolls report, with upside risk to the consensus 205k growth in employment, while the unemployment rate is expected to reach a fresh low of 4.0%. Average hourly earnings inflation should dip from their weather-boosted prior reading.
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