Countdown to Full Taper on Autopilot

ECB Chief Mario Draghi sharpened his language concerning underlying inflation expectations firming up in the Eurozone.

This is a man who crafts his language carefully.

Utilizing a word such as “vigorous” in the lexicon of a dovish central bank operator such as Mr. Draghi to describe inflation sends a signal to markets that the ECB’s stated guidance to end its QE program by the end of this year is anchored in rock-solid ground.

It indicates that, if anything, the risk to changes in current market expectations is to the upside in terms of a potential rate hike by early summer 2019 rather than after the summer.

We see this comment as potentially designed to test the waters in Eurozone bond markets with a trial balloon. Analyst Peter Boockvar noted today,

It was these comments that sent European bond yields to the high of the day and the German 10 yr yield to .50% for the first time since May, up 4 bps today: Mario Draghi said that there is a “relatively vigorous” rise in underlying inflation in the Eurozone. “Underlying inflation is expected to increase further over the coming months as the tightening labor market is pushing up wage growth. Domestic price pressures are strengthening and broadening.” The euro is also back above $1.18 vs the US dollar in response and US treasuries are selling off in conjunction. These comments of course comes a week before the ECB cuts QE in half ahead of its ultimate end in Q4. The German 2 yr yield at -.51% is the least negative since the end of February.

If too much trouble is stirred up in the Eurozone fixed income space, Mr. Draghi could easily back peddle on this comment as he’s been known to do by shrugging it off as nothing new.

The European sovereign bond market training wheels are loosening at the hinges and trying to break free to see how well the bicycle can glide without them.