Markets shaken by BoE and ECB meetings

The BoE raised its base rate by 25bp, which was expected. What was less expected was that it almost raised it by 50bp and announced that it would reduce the size of its balance sheet immediately. For its part, the ECB did not change anything, but Mrs. Lagarde’s press conference made it clear that the ECB was preparing significant changes for its next meeting on March 10th and that it was quite possible that the ECB would raise rates before the end of the year. More details in this News. The markets reacted sharply, reassessing the prospects for rate hikes by both central banks.

Bond yields tightened significantly and, more worryingly for the ECB, intra-zone spreads widened: +10bp on the German 10yr but +21bp on the Italian 10yr. The euro and the pound rebounded sharply against the US dollar. The EUR/USD exchange rate stabilised at around 1.1450. On the equity side, there was a sharp decline in Europe and especially in the US, but Amazon’s results after the close reversed the trend.

January US jobs report today: the consensus is +125k, but no one believes it anymore after the White House warnings and ADP figures that showed a 300k contraction in the private sector. To complicate matters, wages are expected to accelerate to over 5% yoy. All of this still promises quite a bit of volatility.