Divergence Between Central Banks as ECB Takes Action

Northern Trust Asset Management Monthly Market Commentary for March 2021

Eurozone Market Update

As expected, the ECB announced no policy changes in March - the meeting concentrated on long end rate moves. The ECB emphasised that its main focus was to preserve favourable financing conditions, signalling that they will step up QE purchases to achieve this.

In a more forceful reaction than the market expected, the ECB diverged from the BoE by explicitly signalling a step up of the Pandemic Emergency Purchase Programme, increasing weekly purchases to anchor long end rates down. The ECB’s stance would effectively provide a backstop to spreads widening.

Unlike the BoE and the Fed, the first 10bps hike is priced in for 2024, further illustrating the divergence between the Central Banks.

UK Market Update

The BoE's March MPC meeting saw the benchmark rate and asset purchase programme unchanged. Considering the better-than-expected vaccination rollout, and more generous UK budget since the previous meeting, this was a less hawkish meeting than anticipated. The MPC did very little to talk down the moves that we've been seeing in higher rates in the long end.

They did, however, talk up how well the economy may perform once reopened, due to pent up demand. On the front end, the probability of rate hikes are starting to be priced in a lot earlier, which will interest short end investors.

The first 25bps BoE hike is priced in for 2023. Term levels increased during the month, with three-month Libor up 2bps.

US Market Update

The Fed's FOMC meeting saw a sharp upward adjustment to growth and inflation projections in the Summary of Economic Projections, due to the accelerated vaccine rollout, fiscal stimulus and reopening of the US economy.

What drove markets was the combination of increased economic projections with the still very moderate ‘dot plot’ (see chart of the month). While the latter showed slightly more expectations for a rate hike over the coming years, the median expectation sees no rate hike over the forecast horizon.

The next hike for the Fed is priced in for the first half of 2023. The expiration of the Supplementary Leverage Ratio (SLR) will likely lead to a decline in the deposits US banks are able to take and result in investors looking at alternative options that will keep short end rates close to zero.

Global Outlook

We expect US banks to reduce deposits on their balance sheets following the SLR expiry. This should see more money flowing into domestic money market funds as investors look for alternatives. Together with continued T-Bill paydowns and further reduction of the Treasury General Account, this would mean repo and deposit rates stay anchored close to zero. Meanwhile, as the UK continues along the government's reopening roadmap, we look to April 12th as a milestone when many businesses in the service sector will reopen. Europe remains a concern as many countries battle with a third wave of the coronavirus and enter into new lockdown measures. We will be closely watching whether improvements in the vaccine rollout are made, and when economies can expect to reopen.

Chart of the Month

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