At yesterday's close, the Dow Industrials index was 7% below the six-bear average and only 2% above the bottom of the six-bear range – see chart and prior post for background.

The ECB has been at pains to distinguish its securities markets programme (SMP) from US- and UK-style quantitative easing (QE). The differences, in practice, look minor.

Bond buying to date has been on a larger scale than suggested by the stated objective of restoring depth and liquidity to dysfunctional markets. €26.5 billion of securities were purchased in the first seven days (assuming T+3 settlement), equivalent to a weekly rate of €18.9 billion. If this pace were sustained for three months, the ECB would acquire a portfolio of €246 billion, equivalent to 2.6% of Eurozone broad money, M3, and 33% of the outstanding government debt of Greece, Ireland, Portugal and Spain (15% if Italy is also included).

The ECB claims that the SMP will have no impact on monetary conditions because buying will be sterilised. This is oversimplistic. A purchase of bonds from a non-bank investor results in an increase in both the investor's bank account balance, included in the broad money supply, M3, and bank reserves, a component of the monetary base. If the ECB sterilises the purchase by conducting a reserves-draining operation with the banking system, the rise in the monetary base is reversed but not that of M3. (The M3 increase is reversed only if sterilisation involves a sale of assets to the non-bank private sector. Note that M3 is unaffected if the initial purchase is from a bank rather than non-bank.)

While the ECB is sterilising its bond purchases, moreover, it has reverted to supplying unlimited funds in its three- and six-month lending to the banks, in addition to the main one-week repo operation. The monetary base, therefore, is being determined by banks' demand for ECB credit, which has increased as weaker institutions have suffered funding shortfalls. Accordingly, the base has risen by 3.8% in the first two weeks of the SMP and is up by 7.4% since late April.

The ECB's method of sterilisation – auctioning one-week deposits to banks with surplus liquidity – is, in any case, cosmetic. Banks are likely to regard these deposits as a close substitute for reserves. The effectiveness of sterilisation may depend on the length of time reserves are removed from the system, with permanent asset sales having the largest impact.

The SMP, so far at least, appears to pass the QE "duck test". Opposition from Bundesbankers and their ECB allies, however, could yet derail the programme.

As expected, GDP growth in the first quarter was revised up from 0.2% to 0.3%. More importantly, the profile of output over the three months implies a strong starting base for the second quarter.

The chart shows quarterly GDP together with a monthly estimate based on services and industrial production, which have a combined weighting of 93%. After a 0.7% fall in January, partly reflecting weather disruption, monthly GDP rose by 0.6% and 0.7% respectively in February and March. The March reading was 0.6% above the quarter average.

GDP inflation, meanwhile, picked up further last quarter. The deflator for gross value added (GVA) at basic prices – which fully adjusts for the VAT hike and may therefore understate the underlying trend – rose by 1.0%, or 4.0% annualised.

Nominal GVA expansion, therefore, accelerated from 3.6% annualised during the second half of 2009 to 5.1% in the first quarter. Such a growth rate, if sustained, is unlikely to be compatible with the 2% inflation target over the medium term.

The yen, rather than the US dollar, could be the big winner from a loss of confidence in the euro as an international store of value.

More fund managers – a net 51% – believe that the yen is overvalued than any other currency, according to the latest Merrill Lynch global survey. This suggests that they are not positioned for further strength.

The perception that the yen is expensive may reflect its nominal effective (i.e. trade-weighted) exchange rate, which is only 3% below its all-time high reached in January 2008. A correct assessment, however, should be based on the real effective rate, i.e. adjusting for Japan's superior inflation performance. This remains below its long-run average – see first chart.

Relative monetary policies are an influence on currency performance. Real official interest rates (i.e. relative to the annual rate of change of consumer prices) are much higher in Japan than the rest of the G7. The 3.2 percentage point gap with the US is the largest since 1980 – second chart.

The Fed and ECB have responded to market turbulence by expanding the monetary base – see Friday's post. The Bank of Japan has yet to follow – third chart. Fed liquidity injections, if sustained, could limit further US dollar gains, deflecting upward pressure onto the yen.