Will the ECB intensify efforts to keep a lid on bond yields?

Will the ECB intensify efforts to keep a lid on bond yields?

The European Central Bank’s monetary policy meeting on Thursday will give its president Christine Lagarde and other senior policymakers the opportunity to discuss the recent rise in government bond yields.

At the press conference following the meeting, Lagarde is likely to face questions about exactly how high the central bank’s pain threshold is on rising yields.

By then, the ECB will have already provided an indication of how worried it is about the bond market by publishing on Monday the weekly figures for its pandemic emergency purchase programme. 

Analysts expect the ECB to step up the pace of its emergency bond purchases in the first week of March after they fell to €12bn in the final week of February, down from more than €17bn a week earlier. 

“Market participants will be expecting the ECB to deliver on its promises,” said Frederik Ducrozet, strategist at Pictet Wealth Management, predicting its weekly bond buying was likely to rise above €20bn in the numbers released on Monday.

The sell-off in bond markets has spread from the US, where it is being fuelled by expectations that a sharp economic recovery will reignite inflation that eats into real bond returns. 

Inflation expectations are lower in Europe, leading Fabio Panetta, an ECB board member, to say that the recent steepening of the eurozone’s GDP-weighted yield curve was “unwelcome and must be resisted”. 

But other ECB governing council members are more sanguine. Bundesbank president Jens Weidmann said last week that “not each and every increase in financing costs will be a source of concern”, adding that financing conditions remained favourable. Martin Arnold

How fast will US inflation rebound?

Evidence is building that inflationary pressures will rise later this year, as the economic recovery gains traction and coronavirus restrictions decline. Investors will gain further insight on Wednesday, when February’s US consumer price index is released. 

While the Federal Reserve’s favourite inflation gauge, the personal consumption expenditures price index, still languishes around 1.5 per cent, market measures of future expectations have soared since the start of the year as investors eye higher growth after an imminent burst of stimulus from the Biden administration.

Last week, the so-called five-year break-even rate hit 2.5 per cent for the first time since 2008. Analysts surveyed by Bloomberg have raised their year-on-year expectations for February’s CPI to 1.7 per cent.

US yields have climbed, with the 10-year note now hovering around 1.56 per cent. Investors have raised their rate forecasts as a result, with Goldman Sachs predicting the benchmark yield will reach about 1.9 per cent by the end of the year against a previous forecast of 1.5 per cent.

“Inflation measures globally will rise significantly by early summer,” predicted James Sweeney, chief investment officer for the Americas at Credit Suisse, who pointed to goods sector supply issues, a jump in healthcare and financial services inflation, and the likelihood of services sector price rises as demand outpaces inventories.

Given this trajectory, Sweeney expects the Fed to hit its new average 2 per cent inflation target in 2022, with a slight “overshoot” the following year. That may mean the first rate rise could come as early as 2023. Colby Smith

Will China inflation remain in negative territory?

Data released in China on Wednesday are expected to show a key inflation marker remains lodged in negative territory even as scrutiny of the country’s interest rate environment intensifies.

Economists polled by Bloomberg forecast a 0.3 per cent year-on-year decline in the consumer price index in February, unchanged from a month earlier. CPI in China turned negative in November for the first time in more than a decade.

Inflation data in China, which comes a day before the country’s National People Congress concludes in Beijing, will be closely watched by traders and investors looking for signs of when the country will adjust its main interest rate policy following a rapid economic recovery from the coronavirus pandemic. 

Interbank rates in China have crept higher over recent weeks, while in late January an adviser to the central bank warned of an asset bubble if policy were not adjusted.

Stubbornly low inflation in China, driven in part by falling pork prices after sharp increases due to African swine fever, has resulted in a conundrum for policymakers eager to limit risks across a fast-growing economy.

The producer price index, which measures factory gate prices and in January returned to positive territory for the first time since the initial coronavirus outbreak, is expected to have risen 1.4 per cent in February.

The gain at the start of the year was driven by higher costs of raw materials such as cement, and further highlighted the pace of industrial activity across China. Thomas Hale