ECB Announces OMT
Risk assets surged during the New York session following the ECB policy meeting and positive data releases in the US. The ECB left its benchmark rate unchanged at 0.75%. The inflation forecasts were revised up from 2.4% to 2.5% in 2012 and from 1.6% to 1.9% in 2013 – making it less likely for any rate cuts in the foreseeable future. More importantly, Draghi announced the modalities of the ECB’s new bond-buying program called Outright Monetary Transactions (OMT). The OMT program will be open-ended and the liquidity created by it will be fully sterilized. It will focus on buying bonds with maturities of between one and three years. Draghi stressed on the strict conditionality of the EFSF/ESM program, noting that the Governing Council could suspend the program for a member state in case of non-compliance. He also noted that the ECB will accept the same (pari passu) treatment as private creditors for the bonds purchased as part of the OMT program. The details of the program more or less lived up to market expectations, with EURUSD rallying to a high of around 1.265 during New York hours. Draghi noted that the program is “an effective backstop to remove tail risks in the Eurozone” which was reflected in the steep fall of 3m EURUSD implied volatility by about 50bp. Spanish bonds, which gained following a successful auction of EUR3.5 bn bonds, rallied further with the 2y yields falling below 3% and 10y yields inching towards 6%. Elsewhere, the Riksbank sprung a surprise by cutting its benchmark rate by 25bp to 1.25%. Current CPI and growth expectations were upgraded, but inflation projection for 2013 was sharply revised to the downside from 1.7% to 1.3%. The BoE kept its policy rate and asset purchase target unchanged at 0.5% and GBP375 bn respectively, in line with expectations. In the US, the non-manufacturing ISM index rose to 53.7 in August, beating consensus of 52.5, with the employment index bouncing back to 53.7 from 49.3 in July. Stronger August ADP employment report and lower jobless claims last week also helped sustain risk appetite, as S&P500 gained more than 2% to reach a four-year high of 1432. Ahead today, US payrolls data is due. Our economists expect non-farm payrolls to grow by 135K in August against market expectations of 163K. A number markedly lower would likely further raise QE hopes to the detriment of USD.
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