Last month the European Central Bank expanded its emergency asset-purchase programme by €600bn to bring the total to €1.35tn.
Since then, a handful of ECB policymakers have cast doubt on whether the bank will ever spend the full amount. Dutch central bank governor Klaas Knot has been among those suggesting purchases could fall short of that figure, if the bloc’s economy recovers faster than expected from the Covid-19 crisis.
At Thursday’s policy meeting, investors are expecting ECB president Christine Lagarde to clarify that the central bank is not plotting an early exit.
Market conditions have improved since the central bank’s intervention. Borrowing costs in Italy and other southern European countries have fallen back to where they were before coronavirus started to panic investors.
Italy’s 10-year bond yields around 1.2 per cent, a similar level to early March, while the extra spread offered by Italian debt over German bonds — an important measure of risk — has also returned to pre-pandemic levels.
“The tightening of sovereign spreads that we have seen is conditional on the ECB following through and spending the whole amount,” said ING strategist Antoine Bouvet. “If this idea of stopping early becomes official ECB communication, I think you’ll see markets fall out of bed.”
The ECB’s bond purchases in the final week of June fell to their slowest pace since the expansion of the programme, according to central bank data last week.
Investors will be hoping for reassurance that the slowdown is due to a summer lull in markets rather than an effort by the central bank to gradually wind down purchases, Mr Bouvet added. Tommy Stubbington
What are the prospects for a swift rebound in the US?
Investors hoping for a speedy recovery in the world’s biggest economy — despite the return of lockdowns in some states — will have more evidence to dig through this week.
On Tuesday, the consumer price index for June will provide an update on inflation. The following day brings the Beige Book, which compiles anecdotal evidence from regional central banks on the state of local and regional business owners. On Thursday, last month’s retail sales figures are released.
Investors will be hoping for further positive surprises. A bounceback in economic metrics, such as the recent jobs report that showed 4.8m new jobs were added last month, has helped drive stock markets higher. However, many caution that the outlook could soon deteriorate due to the surge in Covid cases across the country.
Some states have begun to pause or even roll back reopening their economies in an effort to halt the spread of the virus. According to analysts at Bank of America, real-time data — including restaurant reservations made on online platforms — are already showing signs of tailing off.
Such indicators “continue to point to a stalling in the economic recovery, owing in large part to the increasing spread of the virus,” the analysts wrote in a recent note. They warn that the path forward for the US economy will be a “bumpy” one. Colby Smith
Will the Bank of Japan consider radical steps?
The Bank of Japan will this week offer hints about whether it will go beyond the policy easing measures taken in response to the pandemic, or start to explore ways to unwind them. Its two-day monetary policy meeting, which concludes on Wednesday, comes as infections in its capital are rising sharply again.
Given that uncertainty, economists at UBS in Tokyo say the market could be looking for signs that the BoJ’s next step will be more experimental.
One idea, says UBS’s Masamichi Adachi, is that the central bank might establish a special fund with the government designed to invest in projects that improve economic productivity.
“The fund can create demand directly. This is a sort of ‘helicopter money’ policy. We believe this idea would be highly controversial and actual implementation is very difficult . . . However, extreme measures may be needed in times of crisis,” Mr Adachi wrote in a preview of this week’s meeting.
More immediately, the market will be looking for the BoJ’s insights on the economic damage wrought by the pandemic.
The most recent government figures showed only a modest increase in consumption activity in May, after a big drop in April. Month-on-month comparisons of retail sales and sentiment suggest Japan’s recovery is being held back by caution among consumers.
Another focus for investors will be the BoJ’s quarterly outlook report, which will be released along with the policy announcement on Wednesday. It is likely to involve a significant downward revision in growth expectations for the current financial year ending.
