ECB Baby Taper, Bonds Bid

The ECB cut its emergency pandemic bond purchases in a mild surprise on Thursday but Lagarde ensured the market didn't view it as a hawkish move. Commodity currencies are leading the gains versus the USD as indices push higher. Canadian employment and US PPI are due on Friday. In the chart below, Ashraf points out a market that has so far moved this year similar to 1997? If the similarility continues, the Sep/Oct could see more declines. What is it? Canada's jobs release is up next. More on that below. 

The ECB announced a 'moderately lower' pace of PEPP purchases as they work towards managing the envelop towards the program's end in March. The initial reaction was euro strength but it soon gave back the move and turned lower. That as compounded as Lagarde emphasized transitory inflation and left hints that more APP buying could replace the PEPP if necessary.

The ECB President clearly didn't want this viewed as a hawkish move and the bond market reaction showed that she was successful. Bund yields fell to -0.369% from 0.325% beforehand.

Still, there was good news for the eurozone as the 2021 GDP forecast was boosted to 5.1% from 4.6% with the 2022 estimate left nearly unchanged. That forecast puts the economy back at pre-pandemic levels before year end.

This week we had central bank decisions from the ECB, BOC and RBA. They followed a pattern where the market largely tuned out.

This could be a sign that at the forefront of trading are more global issues like inflation, problems with supply bottlenecks, labor shortages and China's common prosperity push. We sympathize with that thinking as those global macro themes are likely to overwhelm central bank tweaks.

On the employment front, Thursday's release of US jobless claims fell to a post-pandemic low of 310K from 344K. On Friday, it will be Canadian jobs in focus and they're expected at +100K in August after a +94K reading in July. Macklem, in his Thursday speech maintained a determined tone around an October taper but said it will depend on economic data. The jobs report will be a big factor in that.