After trading in a narrow channel for the first three quarters of 2014, bond markets became increasingly volatile. The first three weeks of 2015 have seen some of the biggest moves in the longer term trend.
Apart from being a factor of traders repositioning into the new year, we can also safely assume that a good amount of the volatility owes itself to expectations for one of this week’s events. The event in question is the ECB Announcement and press conference on Thursday. This dwarfs the week’s domestic economic data in terms of market moving potential.
The reason? This is the first ECB meeting that’s seen as more likely than not to produce an actual quantitative easing announcement.
The ECB already has a bond buying plan they don’t use, but it’s not actual QE. This would be very different. It has been a long time coming, but ECB President Mario Draghi and other QE proponents have been engaged in a never-ending chess match with anti-QE German central bankers.
Germany actually took the ECB to the highest court in the Eurozone regarding the existing bond-buying program, but as of last week, a preliminary opinion from that court suggested no major issues. While the court was clear in saying that the opinion doesn’t translate to how separate programs might be viewed, no one really wants to hear that at the moment. In other words, the absence of vehement disagreement was destined to be a green light for ECB QE.
The only question remaining is “this meeting or next?” Surveys of market participants now give the edge to this week’s meeting. There’s little disagreement that SOMETHING QE-like will be announced. In this sense, markets won’t be surprised. Room for surprises exists in the particulars. Those are the sorts of market movers that tend to have a broader, slower effect over hours and days (as opposed to something like a surprising NFP result, which is traded in seconds and minutes).
The potential drama begins on Thursday morning at 7:45am with the official announcement. But the ECB tends to reserve their big news for the press conference that follows at 8:30am Eastern time.
Before that, the first two business days of the week boast very little by way of meaningful data, with the only upper-shelf report being Housing Starts on Wednesday. Trade is most likely to be motivated by pre-ECB positioning, which means it won’t adhere to any sort of schedule or framework of cause and effect.