A Dollar rally, a fall in Eurozone yields ..... oh, and a red face for the ECB

Wednesday 20th May 2015

A Dollar rally, a fall in Eurozone yields ..... oh, and a red face for the ECB

"Short View" , The Financial Times, p.15

  and

"Euro in big sell-off after ECB chief's dinner speech", The Daily Telegraph, p. B8

An announcement by ECB executive board member Benoit Coeure on Monday night and diverging data from either side of the Atlantic dominated yesterday's trading day. In front of an audience of hedge fund managers, Mr Coeure pledged that the ECB would "front-load" its purchases of bonds (as part of its ongoing QE programme) to avoid the difficulties of illiquidity likely to be faced in the slow summer months of July and August. Unfortunately for the ECB, such market-sensitive statements are supposed to be published to the wider world simultaneously to preclude those in attendance gaining an unfair trading advantage. In this case, the text of the speech was not published until 10 hours later. The problem lay in a technical communications hitch  --  something of an irony as Mr Coeure has been an advocate of improving the ECB's communication procedures.

Still, leaving the ECB's embarrassment aside, what should be read in to Mr Coeure's comments?  They would certainly seem to confirm the determination recently vocalised by his boss Mr Draghi's to continue with the QE programme in full, and demonstrate a flexibility in the ECB's strategies that it has not always been famous for. In fact the plan to get much of the buying done before the market dries up is an eminently sensible one. The comments also suggest that even if the ECB was not actually worried about the extent of the rebound in bond yields, the pace of the recent rise must be a concern. Whether the ECB's words and deeds mean we have seen the high in yields for the time being is another matter, but for yesterday at least it meant lower yields and a weaker Euro.

April's data in the US saw the strongest numbers for both housing starts and new building permits since the financial crisis. Those who believe that recent weak data has largely been attributable to a harsh winter took the news to point to a return to stronger growth, and therefore to upward pressure on US rates  --  hence, a stronger dollar, and UK sterling was particularly under the cosh after CPI data showed a slip into -0.1% deflation  last month.

Markets are jittery and will of course react to anything that may be taken as a pointer to the future, but a little caution would not go amiss here. With regard to the ECB and in the longer term, flexibility can work both ways and the door to adjust policy in the future, should it be judged that targets have been achieved, is still open. And US housing starts ? A notoriously fickle number and anyway.... more than any other measure of growth, if you believe that the winter was harsh enough to produce weak Q1 numbers , surely a sharp rebound was inevitable once weather conditions improved. More confirmation need ........