European Central Bank to reduce volume of bonds under asset purchase programme

Daniel Fowler
June 17, 2018

These opposing views should see interest rates diverging more between the two most powerful central banks in the US's favor, which should continue to lend support to the dollar.

The European Central Bank said Thursday it will end its bond-buying program in December.

The U.S. Commerce Department said on Thursday that retail sales increased more than expected in May.

The Dow Jones Industrial Average fell 7.94 points, or 0.03 percent, to 25,193.26, the S&P 500 gained 7.6 points, or 0.27 percent, to 2,783.23 and the Nasdaq Composite added 62.69 points, or 0.81 percent, to 7,758.39. Roughly four stocks rose for every three that fell.

Mindful of the Bank's two disastrous hikes in 2011 that exasperated the Eurozone's debt crisis, the Bank will seek to balance raising rates with aggravating the debt.

Investors sent the euro sharply lower and bought German government bonds and European stocks Thursday following the ECB's announcement that interest rates would likely remain unchanged at least through the summer of 2019.

The bank said that the stimulus programme's bond purchases would be halved to €15bn per month from October.

For most of this year we've become used to recent announcements from various European Central Bank policymakers that a rate rise might come fairly soon after the asset purchase program had ended, which had raised expectations of some move on rates in the first half of next year. Higher rates can stave off inflation, but they can also hinder economic growth.

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"This is the most lopsided, mismatched labor market in the nation´s history", said Chris Rupkey, chief financial economist at MUFG Union Bank.

"I think its pragmatic for the Fed to take these moves, because if you are not going to make them now, when are you going to take them?" At that, the Fed is also moving gradually; with core inflation at 2.2 percent in May, and headline inflation at 2.8 percent, the US central bank benchmark is only around zero in real terms, when inflation is taken into consideration.

Meanwhile, the council has also decided the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be kept the same at 0.00%, 0.25% and -0.40% respectively.

While rate moves will not be on the ECB's agenda for months, policymakers in public and private have said that market pricings for such a move are realistic.

US DATA: The data for the USA economy released on Thursday were encouraging.

Retail sales data for May smashed forecasts as the royal wedding and sunnier weather drove Britons to spend more freely.

A separate report showed that fewer USA workers filed for unemployment claims last week than expected, an encouraging sign for the labor market.

Benchmark 10-year U.S. Treasury notes last rose 8/32 in price to yield 2.9516 percent, from 2.979 percent late on Wednesday. It gave up gains from the prior day, when the Federal Reserve surprised some investors by speeding up its timetable for rate increases.

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