by Bas van Geffen, senior macro strategist of Rabobank
Back To Sleep
Fixed income markets were in for a bit of a rude awakening after being lulled into a slumber when the Fed’s Jackson Hole conference was moved to an online format last week. After all, if Delta can throw the FOMC’s planned get-together, it might just cause the Committee to reassess its wider impact on the economy. Indeed, expectations of any significant policy announcement at the –virtual– Jackson Hole event are low, and in fact, the market appears have added some speculation that the taper announcement could be delayed even further.
That sleep was rudely interrupted as evidenced by the sell-off in European government bonds yesterday: German 10y yields rising 5 bps and the Italian equivalent even by 9 bps on the back of ECB policymakers De Guindos and Lane. De Guindos’ comments were widely interpreted as hawkish -at least compared to his usual stance- as he noted that the data so far point to a solid Q3. He concluded that the ECB may upgrade its economic projections, and that if the economy normalises, policy should follow. Of course, he probably primarily had PEPP in mind, with the calibration of the unofficial target pace of Q4 purchases up for debate in September. Nonetheless, amidst otherwise quiet markets -with ECB buying also still on summer schedule- that may have startled some slumbering traders.
The market was less unanimous about Chief Economist Lane’s comments. At face value, Lane seemed to strike his usual dovish tone, but a case could also be made for a more hawkish read. For example, being asked when the ‘crisis phase’ (and thus PEPP) are over, he replied “the crisis phase lasts while...