- QE details – size, length of time, composition.
- ECB to purchase a lot in terms of debt outstanding and even more in terms of issuance.
- Which global asset classes can benefit from QE?
- What does QE in the EZ mean for the Fed? Read More
The ECB exceeded market expectations today. This is a robust program, comparable to the Fed’s QE3. From a market perspective I would expect inflation breakevens to move up, peripheral spreads to contract, and peripheral equities to outperform other EZ equities over time. The most important things to keep in mind are: 1. QE is large. In fact, it’s even larger than the substantial rumors that emerged yesterday (€60 billion per month vs. €50 billion per month). The program will include sovereign bonds, bonds issued by EZ agencies and institutions, ABS, and covered bonds. Securities other than ABS and covered bonds … Read More
It’s popular to assume that rates will remain very low in 2015, and maybe that’s exactly what will happen. Still, we shouldn’t ignore the policy and macro fundamentals that should push rates up this year. These fundamentals are a solid US economy, the possible stabilization of oil prices, the Fed raising rates, and QE in the EZ. However, weak global growth, massive increases in global liquidity, and a low Fed terminal fed funds rate will likely continue to exert downward pressure on yields, limiting the upside potential. Under our assumptions, the ten-year yield might approach 2.25 – 2.50% by the … Read More
- Low yields do not equal bad news for the US.
- Four factors that will push yields up in 2015.
- Three factors that should keep yields low.
- Putting it all together: A plausible yield curve at the end of 2015. Read More
We very often get the question of how the Fed can be even thinking of raising rates if inflation breakevens are dropping so fast: Doesn’t that mean that inflation expectations are becoming unanchored? Collapsing breakevens are not necessarily the same thing as collapsing inflation expectations. We look at survey measures and conduct our own computation of the inflation risk premium to show that breakevens are dropping due to a declining risk premium. Distinguishing between the two is very important to understand the Fed’s thinking: A declining inflation risk premium is much more benign than a decline in inflation expectations. This … Read More
The preliminary opinion of the European Court of Justice’s (ECJ) Advocate General regarding the legality of the OMT came out today. The Advocate General found the OMT to be legal subject to some constraints. In a few months the whole ECJ is likely to affirm his opinion. The opinion was very favorable for the ECB and for financial markets as well. The constraints it imposes on the OMT are mild and especially don’t limit in any way the efficacy of the coming QE program. The opinion removed another perceived obstacle to the credibility of QE. I say “perceived” because even … Read More
The ECB is about to embark on a large-scale QE program in the first quarter. In today’s report we discuss our expectations for QE in terms of timing (January vs. March), size, composition, and other details such as whether Greek bonds will be included and at what conditions. There still seems to be skepticism among investors that either QE will happen or (more likely) that it will happen in a meaningful size. As a result many markets in the EZ, which we discuss in the report, are not behaving in a way that is consistent with what happened when QE … Read More
It’s not yet time to throw in the towel on a June liftoff, but we need to keep our eyes open because the month-on-month drop in average hourly earnings (AHE) on Friday is precisely what could spook the Fed. However, for now it’s just one data point, and one that came as part of an otherwise good employment report. The Fed has the luxury of not having to make a decision on rates anytime soon – it’s still more than five months until the June FOMC meeting. For now the Fed will wait and see if subsequent reports suggest Friday’s … Read More
- There are a lot of moving parts, but ECB QE size matters the most.
- Will Greek bonds be included? Various options on the table, but doesn’t matter much to markets.
- What do we expect QE to look like and when will it happen?
- Is QE priced into markets? How will various asset classes react? Read More