Global Bonds Tumble as ECB Expands Stimulus

ECB Extends, but Tapers Stimulus  The much-anticipated European Central Bank meeting today concluded with an expansion of the existing quantitative-easing program that was due to expire in March 2017.  The extended stimulus takes effect April 2017 and will run through the end of 2017.  The major structural change to the program announced was a reduction of monthly bond purchases from 80 billion euros to 60 billion euros ($65 billion), however the Governing Council supplied the caveat that if “the outlook becomes less favorable or if financial conditions become inconsistent with further progress toward a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration.”  The ECB has targeted an inflation rate of just under 2% by the time Mario Draghi’s term ends in October 2019.  Mounting concerns over the strengthening of populist movements throughout the region have also presented a challenge for the council, leading to greater flexibility being built into the bond-buying program.  Total QE purchases are now projected at 2.2 trillion euros, more than double the figure initially announced by the ECB in January 2015.  Also announced by the ECB, the main refinancing rate (0%), deposit rate (-0.4%), and marginal rate (0.25%) will all be held steady at their current levels.   

The ECB’s decision to lengthen the tenor yet pare back the size of its QE program, along with somewhat equivocal commentary from Mario Draghi, generated market volatility across the globe.  The euro whipsawed throughout the day, initially jumping to a one-month high before paring gains and then slipping more than one percent overall in the session.  In Germany, the yield curve steepened more than it had any other day in the past eight years, with the spread between 5- and 30-year yields widening more than 15bps.  The US yield curve similarly steepened, adding 1-7 basis points across the curve and placing the yield on the 10-year note just below 2.4%.  Equities in both Europe and the US traded higher during the day as US indices continued to produce new all-time highs.           

Jobless Claims, Consumer Comfort Improve
In an otherwise light day for US economic data, the number of weekly jobless claims were reported essentially in line with expectations at a seasonally-adjusted 258,000.  Total claims fell by 10,000 from the prior week’s five-month high level, supporting the notion that the Thanksgiving holiday may have generated the temporarily high reading.  Additional data released today included the Consumer Comfort Index, which rose to 45.1 for the week ending December 4th, improving from the previous week’s 44.9 reading.  Consumers’ attitudes towards the economy jumped to their highest levels since April 2015, a solid precursor for demand heading into the holiday shopping season.  Today’s data adds to the already compelling case for the Fed to raise rates at its last FOMC meeting of the year scheduled to conclude next Wednesday.