Bonds: Draghi makes aggressive push for reforms and fiscal stimulus
The following were the yield and basis point (bp) movements of some of the most-watched 10-year bonds this afternoon:
US: 2.40% (-1bp)
UK: Closed
Germany: 0.95% (-3bp)
France: 1.31% (-6bp)
Spain: 2.26% (-12bp)
Italy: 2.48% (-10bp)
Japan: 0.51% (+0bp)
Portugal: 3.04% (-20bp)
Greece: 5.70% (-15bp)
Longer-term sovereign bond yields in the Eurozone fell back sharply on Monday after European Central Bank President (ECB) Mario Draghi called for more fiscal coordination at the euro-area level and increased fiscal stimulus to ward off the threat from slowing price rises - and to accommodate the lower inflation which can result from implementing structural economic reforms.
The central banker's remarks sent the yield on German bunds to their lowest versus US Treasuries of similar maturity to their lowest in 15 years and those on two-year German and Belgian notes into negative territory - with investors shifting towards periphery debt.
In other words, Draghi called on countries such as Germany to allow increased spending and for those countries which carry out reforms to be given more leeway in their deficit targets, instead of being forced to chase nominal deficit targets. The latter become harder to achieve as the rate of increase in prices slows down, much less if they actually fall.
Speaking at the Jackson Hole symposium of central bankers Draghi also said he would acknowledge the recent drop in medium-term expectations for consumer price inflation below the 2% mark. The ECB President in effect flung the door wide open to the possibility - should those expectations continue to fall - of further monetary stimulus, according to some analysts.
In a research note entitled "A major breakthrough" Barclays Research economist Philippe Gudin wrote that "we think the recent economic developments have increased the chance of outright QE as the next step for monetary policies. However, we still believe that the Governing Council will put the focus on the measures announced in June (including the ABS purchase programme), and we do not expect any further announcement before year-end."
Nomura on the other hand does. Their economists reportedly now see a further 10 basis point reduction in policy rates come the September or October meetings of the ECB governing council.
Draghi also defended the idea, as proposed by European Commission president-elect Jean Claude Juncker, of putting in place a €300bn Eurozone-wide programme of public investment.
French cabinet dissolved, reforms to be accelerated
As if on cue, on Monday France's Prime Minister Manuel Valls presented the resignation of his cabinet to President Hollande following opposition from some "rebels" in his own party to the government's recently announced plans to cut public expenditures to finance tax cuts and to accelerate supply side reforms.
Last week Hollande presented his 'responsibility pact' which includes €40bn in cuts to companies' social taxes alongside a €50bn reduction in public spending and an acceleration in supply side reforms.
AB