ECB decision clarifies Europe/US rate divergence, asset managers say

The European Central Bank’s (ECB) move yesterday to ease monetary policy further by trimming the already negative discount rate and expanding and extending its quantitative easing (QE) programme has firmed up the picture of just how different US and European interest rates are going to be, according to asset managers.

Some questioned, however, whether the central bank was communicating effectively, given the sharp market reaction surrounding the actual announcement.

Neil Williams, group chief economist at Hermes Investment Management, said: “The fact euro-zone and US monetary policy will be taking different routes – the ECB loosening, the Fed tightening – was always a given.”

What markets had needed yesterday was guidance on how fast the ECB would be loosening and how far they would end up going, he said.

“By extending [QE] six months to March 2017, and including regional and local debt, his sign of intent is he will do more,” Williams said. 

But by not upping the pace of the bond buying and excluding other assets such as more corporate bonds and mortgage debt, ECB president Mario Draghi is keeping some powder dry, he said.

Williams said that while the ECB’s easing measures were helpful in addressing the symptom – deflation – Draghi could not be expected to solve the problem: a monetary union devoid of economic union. 

“This will take years,” he said.

At AXA Investment Managers, fixed income CIO Chris Iggo, said that, for global investors, the central theme of a divergence in monetary policy remained intact, with the US Federal Reserve expected to raise rates on 16 December.

“The differential between US and European bond yields will move higher,” he predicted.

He said European bond yields were likely to be dragged lower by the reduction in the interest rate floor while US yields would move in the opposite direction. 

“At some point, this will mean investors prefer the US from a yield point of view,” he said, adding that, from an investment strategy point of view, US credit would become increasingly attractive relative to European bonds.

But Iggo noted that QE had not produced inflation. 

“Maybe, on its own, it is not enough,” he said.

Marilyn Watson, head of global unconstrained fixed income product strategy at BlackRock, remarked on the contrast between the market noise and actual changes in monetary policy.

“As the year draws to a close, it is striking how little major central bank rates and government bond yields had moved comparing snapshots of 1 January to 1 December, given how much noise and volatility we witnessed in global fixed income markets during 2015,” she said.

“Several crises have flared up, including but not exclusive to Greece, commodity prices and various idiosyncratic corporate events. But, at the end of the year, has the narrative really moved on?”

She said, however, that yesterday’s easing had gone some way to changing this, and that it was now time to wait for the Fed’s decision in a fortnight.

Schroders senior European economist Azad Zangana said investors who had expected a steeper easing should have paid more attention to the improving macro data.

“After spending the last two months strongly suggesting a significant increase in monetary policy stimulus measures, the president has under-delivered,” he said.

He said Draghi clearly needed to re-examine his communication strategy.

“The difficulty for Draghi in his push for further stimulus is that the outlook for the euro-zone did not necessarily warrant additional stimulus,” he said.

Indicators had recently continued to improve despite the weaker external environment and concerns about security, he said, with low inflation having boosted the disposable income of households in real terms and the resumption of credit flows having increased domestic demand. 

“Overall, the additional stimulus announced today may have a marginally positive impact on the outlook for the monetary union,” he said. 

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