Market wrap: ECB commentary which did not announce QE tapering - Westpac

Analysts at Westpac offered their market wrap for the US session.

Key Quotes:

"Global market sentiment: The US dollar, and European and US bond yields, are lower, following ECB commentary which did not announce QE tapering.

Interest rates: US 10yr yields fell from 2.09% to 2.03%, coinciding with a 6bp decline in German 10yr yields following the ECB.

Fed fund futures yields fell, now pricing the chance of a December rate hike at around 31% (from 36% yesterday). It’s unclear how much of that repricing is due to the ECB-inspired fall in yields rather than yesterday’s US debt ceiling extension (which pushes out the negotiation to December when the Fed was expected to hike).

Currencies: The US dollar index is down 0.8% on the day, to a three-year low. Outperformer EUR rose from 1.1925 to 1.2059 following the ECB. USD/JPY fell from 109.00 to 108.05. AUD rose from 0.7975 to 0.8045. Underperformer NZD initially fell from 0.7210 to 0.7172 following an election poll, but then followed the other majors higher to 0.7242. AUD/NZD jumped from 1.1080 to 1.1120 immediately after the NZ poll, then ground higher to 1.1145 – a 17mth high.

Economic Wrap

The ECB kept its policy rate unchanged, as was widely expected, but did not announce any changes to its QE program (which some in the market had expected). Draghi did say that the ECB will decide on the policy calibration for next year in the autumn, but did not expand. Staff forecasts were broadly unchanged, the key alterations being a modest upgrade in growth in the current year, reflecting improvements so far this year, and a modest downgrade to inflation due to EUR strength. Draghi’s opening comments repeated that the inflation path remains subdued and so substantial accommodation is still needed and that rates will not alter before their APP has completed. There were several comments about exchange rate “volatility” as a source of uncertainty.

Fed hawk Mester said she was comfortable with another rate hike this year, and that Fischer’s retirement will be a loss."