The European Central Bank recalibrated its large-scale emergency asset purchase programme, with investors’ attention turning to the US legislative agenda
The ECB decided to reduce moderately the pace of (PEPP) government and corporate bond purchases, compared with Q2:2021 and Q3:2021 (circa €80 bn per month).
Although the ECB did not specify the new pace, the most likely range is €65 – €70 bn per month, while further decisions for the future of the PEPP are expected in December. PEPP’s total envelope of €1.85 tn is expected to be exhausted on schedule (March 2022).
In order to avoid an abrupt reduction of asset purchases, and consequently, an unwarranted tightening of financial conditions, the ECB will probably increase the pace of its regular asset purchase programme (APP) by €40 - €60 bn per month (current pace of €20 bn per month).
Markets’ reaction to the ECB was dovish, as the decision regarded only a modest deceleration in the PEPP, combined with the fact that investors were well prepared following recent officials’ comments. Euro area periphery Government bond yields declined significantly post-ECB, with Italian and Greek spreads down by circa 4-6 basis points to 103 bps, and 115 bps, respectively.
Global equity markets lost ground in the past week, with mixed economic data, uncertainty regarding the return to normalcy due to the Delta variant and some concerns regarding the timing and speed of QE tapering by the Fed.
The S&P500 completed five straight sessions in the red (since September 2nd), closing the week down by 1.7% wow (+19% year-to-date), while the EuroStoxx lost 0.8% wow (+18% ytd). In all, the MSCI ACWI was down by 1.2% wow (+14% ytd). Nevertheless, investors appear to look past near-term drag on activity, with valuations remaining elevated (albeit range-bound) and expectations for corporate profitability solid.
Looking forward, US inflation remains high on the agenda for investors. August’s CPI is due today, with the Inflation Nowcasting model from the Federal Reserve Bank of Cleveland suggesting stable readings of +5.3% yoy for the headline and +4.3% yoy for the core (+5.5% yoy & +4.5% yoy, respectively for September).
September carries a massive risk to the US legislative agenda. Specifically, the $1 trillion (4.7% of GDP) bipartisan bill on infrastructure, which entails a net increase of roughly $500 billion in spending over the next 10 years, could be finalized by the end of the September. The political landscape is more challenging regarding the $3.5 bill, which focuses on social and climate policies.
The House of Representatives Ways and Means Committee revealed yesterday an initial proposal for the respective funding. The proposal includes, inter alia, a top corporate tax rate of 26.5% (less than President Biden’s initial proposal of 28%) and a return of the top individual tax rate to 39.6%.
Finally, the debate on the federal debt ceiling (i.e. the maximum amount of debt that the US Treasury can issue to the public or to other federal agencies, currently at $28.5 tn) is due to come to the fore soon. According to the Congressional Budget Office, if that limit is not raised, the Treasury would probably be unable to make its usual payments, most likely in October or November.