Week Ahead: ECB speaks, US CPI released & BoC makes statement

We’ve a busy week ahead for European economics with the ECB press conference and rate statement. Are changes to economic policy coming to halt steepening yields? In the US, CPI data is released, gauging the effects of inflation. The Bank of Canada will also be making its overnight rate statement, and a strong economic outlook for Canada could mean a change in bond-buying policy.

Will ECB tweak its bond buying programme to tackle steepening yields?

Bond yields have coloured a lot of monetary policy talks in recent weeks, and we’ll be looking to the European Central Bank’s response to steepening curves in this week’s ECB statement and press conference.

We’ve previously seen Executive Board Member Fabio Panetta make the case for continuing bond purchases and keeping financial support going while the pandemic continues.

“The steepening in the nominal GDP-weighted yield curve we have been seeing is unwelcome and must be resisted. We should not hesitate to increase the volume of purchases and to spend the entire PEPP envelope or more if needed,” Panetta said on Tuesday 2nd March.

“Policy support will have to remain in place well beyond the end of the pandemic,” he added. “Risks of providing too little policy support still far outweigh the risks of providing too much. By keeping nominal yields low for longer, we can provide a strong anchor to preserve accommodative financing conditions.”

Despite this, we saw a slowing in the ECB’s bond-buying programme on Monday 1st March. Then, the Bank had settled €12bn in bond purchases, against €17.5bn the previous week. The decline is due to much higher redemptions, Bloomberg reports. A sign of a policy readjustment to come perhaps?

This may run counter to Panetta’s wishes: “We must establish the credibility of our strategy by demonstrating that unwarranted tightening will not be tolerated.”

“We have ways to react to this,” Jens Weidmann, Governor of Germany’s Bundesbank, told CNBC. “The PEPP comes with flexibility and we can use this flexibility to react to such a situation.”

The EU’s emergency bond buying programme will last until March 2022 as it stands, with total purchases coming in at €1.85tn. Weidmann indicated that the ECB may step up purchases again in the wake of rising yields.

“This is one element that is on the table, to use the flexibility we have in implementing the PEPP,” Weidmann said. “But again, the first step is to analyse the root causes and also to see what effect we have on our ultimate objective which is price stability.”

Yields and the ECB’s response will take centre stage when it makes its next announcement on March 11th.

US CPI, yields, and inflation

We’ll also get to see if inflation is really starting to bare its teeth in the US with the release of the latest Consumer Price Index (CPI) report from the Bureau of Labor.

Rising US bond yields have essentially been the talking point for the last couple of weeks, as they have affected financing global. Yields on the benchmark US 10-year Treasury Note passed 1.3% on February 17th and have since jumped to almost 1.6%.

Yields tend to rise with inflation expectations as bond investors become less inclined to sit on low or negative-yielding assets in real terms. Higher yields can also mean more debt servicing for major firms. This tends to knock stock markets as traders reassess the environment for investing.

Prior to this, January’s CPI actually showed a retraction, when inflation declined to 0.3%. Year on year, the CPI stayed flat at 1.4%. Core CPI, which excludes volatile food and energy prices, edged lower to 1.4% in January from 1.6% in December and came in lower than the market expectation of 1.5%.

Price pressures are likely to have been stronger in February.

The higher yields and inflation levels are also being watched under the context of further stimulus. Joe Biden’s $1.9 trillion package is very likely to be passed soon, which will induce, it’s hoped, more spending and consumption throughout the US economy. With more readily available cash, inflation may edge higher.

There’s a lot to be gleaned from this month’s US CPI release.

BoC rate statement – no major changes expected

The Bank of Canada will set out its latest rate policy this week. Could we see an easing of economic support? Preliminary GDP reports suggest Canada’s economic outlook is relatively healthy, so a reduction in bond purchases could be on the horizon.

In a January press release, Canada’s central bank stated it will hold current level of policy rate until its inflation objective is achieved, while continuing its quantitative easing programme, purchasing CAD$4bn worth of bonds each week.

However, Canada’s latest GDP figures show a resilient economy. The Canadian economy grew at an annualized rate of 9.6% in the fourth quarter, data from Statistics Canada showed on Tuesday March 2nd, beating analyst expectations of 7.5%.

Interest rates are likely to stay at near-zero until 2023. Mortgage rates have started to creep up, however, in response to steepening yield curves, but the base rate will stay low for another couple of years, says BoC Governor Tiff Macklem.

Despite some observers believing the stronger economic outlook maybe about to signal a cut in bond purchases, BoC has sped up purchases of provincial bonds as part of an overall strategy to counter rising yields, as well as provide more liquidity to provinces to bolster its economy against the ongoing Covid-19 pandemic.

The central bank bought CAD$436.5 million of bonds via its Provincial Bond Purchase Program last week – the most since the start of that effort in May.

Like all economies, though, it’s probably unlikely that Canada will make any seismic changes during when it makes its rate statement decision on March 10th.

Major economic data

Key earnings data