ECB Pulls Off a Dovish Taper

Today, the European Central Bank (ECB) announced that it will begin to taper bond purchases to 30 billion euros per month (currently 60 billion) in January 2018. Though the move was expected, and largely priced in, the ECB clarified its intentions on some key points, which helped soften the message even more for markets.

For starters, the central bank reiterated its intent to extend its purchases for an additional nine months (until September 2018); but rather than making this a hard cutoff, the ECB stated that purchases could continue beyond that date if necessary. It also added an element of guidance regarding the reinvestment of maturing debt, saying that it would continue for “an extended period of time after the end of net asset purchases, and in any case for as long as necessary.” This gave the overall message a dovish tilt relative to expectations, which led to a slight weakening in the euro and a move higher for European equity and debt markets (a small fall in yields).

In his press conference, ECB President Draghi’s overall assessment of the economy seemed brighter than previous meetings, though he mentioned that below-target inflation remains a concern, as does the potential for a stronger euro, which could further constrain prices.  In addition, he noted that the euro area still needs “ample” stimulus, where his previous statements indicated stimulus needs were “very substantial.” This small change in wording may not seem impactful, but central bank liquidity has been a major driver of markets since the financial crisis, and this shift in language implies that the ECB’s confidence in the ability of the European economy to sustain itself with less monetary stimulus is growing.

So what does this all mean for markets moving forward? Continued accommodation from global central banks, including the ECB and the Bank of Japan currently outweigh the impact of the Federal Reserve’s (Fed) rate hike campaign and recently implemented balance sheet normalization program. But as the Fed’s program continues to accelerate, ECB purchases shrink, and other central banks such as the Bank of England shift toward more restrictive monetary policy, we believe that we may be moving closer to a time when central banks could begin to fade as the primary drivers of the markets, and fundamentals may return to the forefront.


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