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ECB Trims Pandemic Bond Buys,  Sharpening Fed Tapering Expectations

The ECB trimmed its emergency bond buying program, putting the Fed's next move in tapering sharply in focus.

The European Central Bank trimmed the pace of monthly bond purchases in its pandemic support program Thursday in an expected move that could have implications for Federal Reserve tapering in the coming weeks.

The ECB said monthly purchases would slow to €60 billion under its €1.85 trillion pandemic emergency purchase program (PEPP), from the current pace of €80 billion, while keeping its main interest rates unchanged, following a two-day policy meeting in Frankfurt.  

“It may be small but it is noteworthy that the European Central Bank has beaten the Federal Reserve to the punch and is tapering its support first. It was thought developed economies would wait for the Fed to move first and react accordingly, but these are not normal times for monetary policy," said Hinesh Patel, portfolio manager at Quilter Investors.  

However, markets will take this news in their stride as a result of already being largely discounted. And whilst this is tapering, to some extent the main support programs are still in place to support 'disorderly”' markets should we have an adverse shock," he added. "As a result, the ECB is spelling out that their role in the pandemic is coming to an end and they should only be relied upon in an emergency scenario."

The Stoxx 600, Europe's broadest benchmark, pared some of its earlier losses following the ECB decision, but is still trading at a three-week low of 466.40 points.

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U.S. Equity futures were also on the move, with contracts tied to the Dow Jones Industrial Average indicating an opening bell decline of 35 points and those linked to the S&P 500 priced for a 4 point dip.

The Federal Reserve will conclude its own two-day policy meeting on September 22, with investors looking for detailed guidance on the fate of the central bank's $120 billion in monthly bond purchases, which began during the peak of the coronavirus pandemic in March of last year.

Fed Chairman Jerome Powell said late last month that while enough progress has been made on inflation to justify near-term tapering, the job market remains weakened by the rise of Delta variant infections.

Since then, the Bureau for Labor Statistics reported that only 235,000 new jobs were added last month, the weakest tally since February.

"There has also been clear progress toward maximum employment," Powell told the Kansas City Fed's Jackson Hole Symposium. "At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year."

"The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant," he added. "We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions."