European Central Bank President Mario Draghi delivered his customary press conference following this morning’s policy announcement. Markets expected him to be bond friendly, but the realities of his words suggested those expectations could have been even bigger. Draghi was flat-out pessimistic on the economy and inflation.
Most strikingly, he wasn’t skipping a beat in delivering this message. It was a confident and matter-of-fact presentation of bearish economic realities. The ECB’s expectation is that those realities will take a toll on economic data in the short term as well as inflation. Bonds love crappy econ data and lackluster inflation. They also loved the implication that the ECB–like the Fed–is ready and willing to adjust its policy normalization plans in order to offset any economic downturn that gets too threatening.
Either way, we seem to have quickly gone from the world’s 2 biggest central banks being fairly confident in the global economy chugging right along to being just as confident that we’re about to see weaker global growth and no traction for inflation.
The market effects were unsurprisingly focused on European bond markets, but US bond markets caught some of the spotlight and did their own little dance. Notably, it wasn’t until stocks hit their lows of the day that bonds were able to get past the morning’s resistance levels around 2.71% in 10yr Treasury yields. That’s right where 10’s ended up at the 3pm CME close after briefly making it down to 2.70%. Fannie 4.0 MBS were as much as a quarter of a point higher just after 1pm, but dialed it back to an eighth-point gain by the afternoon.