Friday's Market Minute: The ECB Continues To Move The Goal Post

Equities are making small gains once again as investors continue to reap the rewards of remaining positive despite Monday’s worrying sell-off. The broad market climbed for a third straight day following the ECB’s continued commitment to dovish monetary policy. The bank announced it will keep buying bonds to maintain negative interest rates to shift the eurozone economy out of its persistent secular pattern of sluggish inflation. In its statement, the ECB stuck to its guidance that the pandemic emergency purchase program (PEPP) will last until at least March 2022. Considering that inflation has run below the ECB’s earlier target of close to, but below 2 percent for almost a decade, investors will continue to remain skeptical about the likelihood that the bank will meet its new goal. Appetite for liquidity remains robust as the German 10-year bond yield hit negative 0.428 percent, and the yield on the 10-year Treasury note hit its lowest level since mid-February earlier this week.

While the U.S. Federal Reserve is still debating when to wind down its QE purchase program, sovereign debt continues to be in relatively strong demand. Negative rates in Europe exist because of a multi-decade savings glut, low returns on capital investment, and a consumer culture that dwarfs the United States. As long as major central banks across the world continue to follow the same monetary playbook in tandem, global interest rates will remain accommodative as the international capital markets recycle surplus savings into investment demand.

It certainly feels like we are in at least a small-scale transition period in U.S. equity markets, but not much has changed since the beginning of the year. Despite the consensus belief that rates would rise on economic strength, Treasury yields have fallen 45 basis points since the end of March. During the same period, the S&P 500 has advanced nearly 10%. The factors of continued economic recovery, solid corporate earnings, accommodative monetary policy, and a lot of money on the sidelines from savings and cheap borrowing is all still there. The Delta variant remains an ever-present downside risk for the markets in the near-term, but as long as inflation remains only a temporary problem, it also keeps central bank hawks at bay.

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