Knowledge. Shared Blog

July 2019

At ECB Meeting, Shock and Bore

The European Central Bank (ECB) meeting on July 25 was billed as the most important ECB meeting of the last few years. Andrew Mulliner, a Global Bonds Portfolio Manager, reflects on the outcome of this highly anticipated session.

The July 25 European Central Bank (ECB) meeting was billed as the most important ECB meeting of the last few years. Today’s statement and press conference, read in isolation, mark a significant statement of intent regarding the ECB’s willingness and ability to “do whatever it takes” (version 2.0).

In reality, the main event had already occurred in Sintra, Portugal in June, at the ECB’s Forum on Central Banking – the ECB’s equivalent to the U.S. Federal Reserve’s Jackson Hole Economic Symposium. At the forum, President Mario Draghi and other ECB officials had set forth a much bolder vision of future ECB monetary easing than many investors (including me) felt was possible, including lower rates and additional asset purchases that were all but confirmed at today’s meeting.

In the intervening weeks since Sintra, the market has moved to price in an additional 20 basis points of rate cuts in the coming months, and peripheral bond yields and corporate spreads have fallen dramatically on the expectation of a significant asset purchase program. Subsequently, despite the headline billing for today’s meeting, the ECB managed to deliver “shock and bore” rather than “shock and awe” to investors.

As a result, the markets’ initially euphoric reaction to the confirmation of an imminent shift to easier policy has quickly been unwound, with the euro heading toward the highs of the day, German bund yields – having hit record lows – retreating sharply and equities turning flat for the day.

Investors, like children waiting for Christmas, can be short on patience. With key additional information missing, such as the size and composition of asset purchases as well issuer caps, the market is left with almost exactly the same amount of information as before the meeting. Patience may be a virtue, but it sure is boring.

Quantitative (or Monetary) Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market.
Basis Point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
Corporate (or Credit) Spread is the difference in yield between two bonds with similar maturity but different credit quality.

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