Daily Agenda: ECB Tries More Negative Medicine

The central bank cuts three benchmark rates; Nasdaq buys ISE; inflation picks up in China; Lula faces fresh charges.


Martin Leissl

As had been widely anticipated, the European Central Bank today announced a cut for all three key benchmark rates and an expansion of the quantitative-easing program. The overnight deposit rate was pushed further into the red at minus 0.4 percent versus a prior minus 0.3 percent with a bond purchase facility of 80 billion euros ($87 billion). Critically, corporate bonds will now be eligible for purchase within the easing program. The euro sold off sharply, losing more than 1 percent within minutes of the announcement. Investors will closely follow a press conference hosted by ECB President Mario Draghi for signals of policymaker’s strategy going forward as they combat deflationary pressures. The open question is what further monetary policy course the bank may take if negative rates fail to jump start spending and growth within the common currency zone.

Nasdaq makes a major move in options markets. On Wednesday, Nasdaq announced an agreement to acquire the International Securities Exchange, a leading New York-based derivatives platform, for $1.1 billion from Frankfurt, Germany’s Deutsche Boerse, which is in the process of acquiring the London Stock Exchange. The combined percentage of listed options volume accounted for by New York-based Nasdaq’s current options venues and ISE will significantly exceed the market share of Chicago’s CBOE Holdings, the current dominant player by number of transactions. Some analysts note that the CBOE will continue to retain an industry leadership for now due to its widely followed benchmarks and product originations. The merger is expected to be completed by the second half of 2016.

Inflation picks up in China. Data released by China’s National Bureau of Statistics on Thursday indicated that prices rose significantly in February, with the headline consumer price index rising by 2.3 percent year-over-year, the fastest rate of expansion since 2014. The politically sensitive food component was a primary driver of the increase, with a surge of 7.3 percent versus prices in February 2015. Analysts noted that Lunar New Year holiday preparations may have added a seasonal distortion to food-cost inputs. Separately the producer price index declined by 4.9 percent, the 48th consecutive year-over-year contraction for the measure.

Lula faces new graft charges. On Wednesday, state prosecutors in Sao Paulo unveiled fresh charges against former Brazilian President Luiz Inacio Lula da Silva relating to the ongoing Petrobras scandal that has engulfed the country’s political and business establishment. The indictment specifically charges Lula with hiding assets and money laundering. Meanwhile, current President Dilma Rousseff is facing increasing demands from the legislature for impeachment proceedings against her. Opposition groups are planning a national protest on March 13.

Japanese repo markets distorted by negative rates. Less than a week after Japanese government bond (JGB) yields tested all-time lows, rates on repurchase agreements for interbank overnight lending hit a new record. On Thursday, the repo rate for shorter-term JGBs reached minus 0.086 percent, with lenders willing to pay a premium to hold JGBs as collateral. Analysts cite a decreasing supply of government debt as the Bank of Japan’s quantitative-easing facility continues to purchase them at a brisk pace.

Initial claims drop to multi-month low. Department of Labor data released this morning indicated that the number of new claimants for unemployment benefits in the week ending on March 5 fell to the lowest level since October 2015 with a decline of 18,000 applicants versus the prior week for a total of 259,000. Consensus forecasts were for more than 270,000. Continuing claims data also improved with the number of unemployed still receiving benefits falling by 32,000 to 2.23 million.