The centrepiece of overnight attention was always going to be the ECB policy meeting.  After the thunderclap warnings and expectations into the December meeting and then disappointed expectations, was last night’s meeting going to be a repeat or the real deal?

It’s been more toward the latter that’s transpired, at least as far as using all available tools in terms of lower/negative rates, boosting QE, including to purchase corporate debt and support for bank profits by paying banks to lend.  There was certainly the push further toward if not into negative rates as a feature, but more and Draghi downplayed expectations of further rate cuts as the main future policy instrument.  The main refi rate and the marginal lending facility rate were both cut by 5bps, to 0.00% and 0.25% respectively(no cut was expected to these), while the deposit facility rate was cut as expected by 10 bps to -0.40%.

But the future emphasis of policy has seemingly shifted with more emphasis on direct support for bank lending.  There was certainly something in the air suggesting the Bank is switching tack and this did subsequently get the market’s attention.  ECB President Draghi ended his press conference by saying, “we do not anticipate reducing rates further.” Instead the ECB hopes that it will both spur the Euro Zone economy and help out flagging bank profitability by coercing banks to use its new borrowing facility.

My colleague Gavin Friend neatly summarised the new approach: Termed ‘TLTRO II’, the ECB is now offering banks a new unlimited liquidity facility, which will start in June 2016 with four operations (one per quarter ending March 2017) where banks can borrow unlimited amounts at whatever the prevailing MRO is (currently zero). But if banks lend that money, they can get additional discounts to a maximum of the current -0.4% Deposit Rate. In other words banks that fulfil reasonably meagre lending requirements could be paid by the ECB to lend. What is not to like about that?  Banks will also be able to transfer prior TLTRO and LTRO borrowing for the new cheaper version (providing this money was then leant out) to increase profits further. Hats off then to the ECB addressing the concern that negative rates could have on bank profits, concern that had stemmed from resistance by banks to offer negative retail deposit rates, funding being supported from the ECB.

It’s been a topsy-turvy reaction in European markets.  The EUR/USD was trading at 1.0975 into the ECB, it dropped sharply to 1.0818 as news of a larger-than-expected package emerged, only to reverse through 1.1150, to be trading at just over 1.12 this morning, the market taking its lead from Draghi’s no further rate cut comments.  European bank stocks initially surged, up 5.1% in the first hour or so after the announcement, but ended the session down 0.52%.  Feedback from a stronger Euro one could possibly surmise.  Through all this EUR/USD volatility, the AUD/USD traded somewhat lower from 0.7490/7500, now consolidating around 0.7450 in early local trade, though more it seems from a pull-back in oil prices and subdued LME metals prices.  The AUD/EUR though is down 2.33% this morning, to 0.6650/55.

Coming Up

The immediate data flow now winds down into the end of the week with just the NZ manufacturing PMI for February out this morning at 8:30 AM, followed at 845 by NZ food prices. That’s pretty much it for our time zone today, with the local market to open on Monday in the aftermath of tomorrow’s release of the key February Chinese trifecta of activity reports, industrial production, retail sales, and fixed assets investment.  A slowing in industrial production growth for the first two months of the year combined is expected from 6.1% to 5.9%, also for fixed assets investment from 10.0% to 9.5%, while retail sales growth is expected to tick up from 10.7% to 10.9%. We would also be aware of the potential for the shifting timing of the Lunar New Year to impact these numbers.  We will have a fairer read as far as these three sectors are concerned in a month’s time once the March figures are released.

It’s a fairly quiet night tonight with only the Canadian labour market report for February to speak of in terms of potential market sensitivity, though if the unemployment rate remained steady at 7.2% and employment rises a modest 10K after January’s 5.7K drop, any marked reaction from the $C would be a surprise.

Next week, most attention will be on the FOMC meeting on Wednesday and what it reveals about members’ projections of the funds rate (the so-called “dot points” charts) and the economy. Australia’s employment/unemployment report for February is due Thursday, while the BOJ is also meeting mid-week.

Overnight

On global stock markets, the S&P 500 was -0.30%. Bond markets saw US 10-years +4.75bp to 1.92%. On commodity markets, Brent crude oil -2.41% to $40.08, gold+1.0% to $1,270, iron ore -0.2% to $57.92. AUD is at 0.7445 and the range was 0.7427 to 0.7512.

Good luck.

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• Markets Today: 11 March 2016 (PDF,1MB)

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