- ECB keeps rates unchanged but holds the door open for further easing.
- BoJ's aggressive move has put downward pressure on global bond yields.
- Focus on U.S. employment report -- we expect job growth above 200K in March.
Asian stock markets celebrated the aggressive easing from the Bank of Japan overnight with Nikkei up 3.4% at the time of writing. The easing measures far exceeded market expectations and Kuroda signalled that the current pace of government bond purchases of now more than 10% of GDP will be continued next year (see Flash Comment Japan: don’t fight Kuroda, 4 April). With the Fed expected to start tapering off its purchases this year, there is a strong case for JPY weakness and USD/JPY continued its move higher overnight, further supporting the stock markets.
The other big event yesterday was the ECB meeting. Although the ECB kept rates unchanged, Draghi highlighted the downside risk to the outlook and opened the door for further easing (see ECB meeting: Draghi is warming up, 4 April). We think the reason why the ECB did not deliver any stimulus measures at this meeting is that it needs to make sure that it is feasible within its institutional setup. Added to this, it will ensure the measure will work effectively and as Draghi concluded, the experience suggests that the ECB needs to think deeply.
Outside Japan, risk sentiment in European stock markets was hurt by the fact that the ECB did not deliver anything and a feeling that it is running out of options. A spike in US initial jobless claims of 28,000 in the last week of March further added to the negative sentiment, although the move is likely largely due to seasonal distortions. Nevertheless, US stock ended the day almost flat.
In bond markets, the most dramatic move has been in Japanese bonds where the 30-year JGB has dropped 48bp in two days. Also US and German 10yr rates have moved into a new and lower range. A combination of aggressive easing from the BoJ, which included an extension of the maturity on its government bond purchases, and the dovish tone in Draghi’s comments at the ECB press conference put downward pressure on yields. US 10-year treasury yields declined almost 6bp yesterday and the German bund is yielding only 7-8bp above the all-time lows from June and July 2012.
In FX markets, USD/JPY continued the trend higher overnight but is back at 96.3 this morning. For EUR/USD; the initial rise following the ECB meeting has held overnight.
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