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The search for yield and looser monetary policies across the board, favor sovereign spreads compression, despite a worsening global outlook, poorer incoming data and balance of risks, and the lack of improvement of fiscal disequilibria.
The central bank came in line with what we were expecting announcing a strong package of further accommodative measures. It enhanced the forward guidance on rates, cut the depo rate by 10bps, announced a two-tier system for bank reserves and a new open-ended asset purchase program (APP) and sweetened TLTRO-III conditions.
Last week, the annual economic policy symposium was held in Jackson Hole. This year's theme was the challenges for monetary policy. Although fiscal policy was not the subject of debate, it cast a shadow over the event.
Economic data and news this summer in Europe are disappointing; especially for the signs of vulnerability of the more open economies following the slight fall in production in Germany and the fading expectations that the main risks would diminish in the second half of the year.
Faced with a 0.1% GDP contraction in the second quarter and the possibility of a third-quarter repeat—as raised recently by the Bundesbank—there is speculation that the German government may approve a stimulus package of up to EUR 50 billion (1.5% of GDP).