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Investors like to find a ‘story’ to explain complicated markets, and the stories stick around until a shock brings them to an end. Since 2009, there have been four stories that dominated the US Treasury market for certain periods, each about what the Fed would do next. Investors now need to figure out what could disrupt the current story, and they should be looking at this week’s Fed monetary policy statement with interest.
The ECB has introduced an asset purchasing programme earlier than expected. The announcement stated the importance of structural reforms and also that fiscal policy should be seen at an aggregate level rather than a country level. Structural reforms in countries such as Italy and France could keep inflation low for longer. If this is not compensated for by more spending in the core, it could end up forcing the ECB into a more aggressive QE programme.
The central bank conference at Jackson Hole usually brings news about the Federal Reserve, but this time round it was the same story from Chair Yellen that the unemployment rate isn't everything. Instead, ECB President Draghi seized centre stage. By pointing out that the participation rate explains much of the difference between US and Eurozone unemployment, Draghi made clear that monetary policy is no longer about just inflation and unemployment.
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