marctomarket.com / by Marc Chandler / JULY 19, 2017
It was ECB President Draghi’s speech in the central bank conference in Portugal on June 27 that began the current market phase. He seemed to acknowledge the obvious, which that ECB officials may be as surprised as any one with the market’s dramatic response to the assessment reflationary forces are at play.
The day before Draghi spoke, the 10-year German Bund yield traded near 23 bp. It peaked a week ago near 62 bp. The yield has eased a bit in what appears to be consolidation ahead of the ECB meeting. This is part of the overall tightening of financial conditions was the market’s reaction function to Draghi’s comments. The Bloomberg measure of financial conditions has tightened by 50 bp this month. Conditions are the tightest since the end of 2014.
Macro-fundamental conditions have not changed much in recent weeks. The euro area is enjoying a cyclical expansion, and growth continues to exceed trend. However, inflation remains lower than desired, and wage growth remains modest. If last month, the ECB’s analysis allowed Draghi to conclude that the movement to price stability required continued extraordinary accommodation, then nothing since suggests otherwise. If anything, the tightening of financial conditions and would suggest less, not more future inflation.
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