Bond yields have plunged, the euro has weakened and stocks have rallied since the plan was announced. The market moves have surprised those who argued quantitative easing in Europe lacked potency given the region’s reliance on bank funding, limited exposure to equities and already-low bond yields.
So much so that the ECB’s offensive is having a bigger bang in markets than did the QE programs of the Federal Reserve and other foreign counterparts, according to Citigroup Inc. economist Michael Saunders.
Take bonds. Compared with the 50 days before the ECB announced its intentions, Saunders calculated that the average yield on euro-area 10-year government debt has fallen about 80 basis points. The rates of similar securities in the U.S. and U.K. rose on average in the 100 days after their central banks announced QE programs and those of Japan were largely unchanged.
As for equities, the 22 percent gain in the Euro Stoxx 50 index outpaced the average 10 percent to 15 percent in the U.S. and U.K. The euro’s 9 percent decline on a trade-weighted basis is deeper than the falls of the dollar and sterling.
At Barclays Plc, Jim McCormick, global head of asset allocation, said in a report today that Draghi’s favored market-measure of long-term inflation expectations had also climbed to 1.70 percent from as low as 1.48 percent before the QE plan was announced.
Citigroup’s reasoning: The ECB program is larger as a share of outstanding bonds than those before it and the negative interest rate on bank deposits at the ECB is magnifying its effect. The ECB bought 26.3 billion euros ($28 billion) of public-sector bonds as of March 23.
Draghi is getting a hand from the Fed, whose preparations to raise rates are encouraging the euro’s fall, and cheaper oil, which is providing additional stimulus, said Saunders.
Whatever the cause, economists say the market moves will help stoke the real economy. Citigroup predicts growth next year will match 2010 as the best since 2007 and inflation will reach 1.5 percent from 0.2 percent this year.
Success may still come at a price. If inflation accelerates more than the ECB predicts there may be pressure to slow the bond buying.
While Draghi says the ECB’s intent is to complete the 1.1 trillion-euro program in September 2016, France’s Christian Noyer and Bostjan Jazbec of Slovenia have said the purchases could be pared at some point.
“The turning point in the euro-area yield development could occur in the fourth quarter when tapering discussions emerge,” DZ Bank AG strategists Daniel Lenz and Felix Herrmann say.