ECB Preview
ECB Preview: Draghi unlikely to bring anything out of the hat this time but that's no reason to be complacent
A quick look at today's European Central Bank meeting and press conference 2 June 2016
I'm not expecting any fireworks from the ECB today with regards to any changes in interest rate or QE but it would be churlish to be complacent with the presser always guaranteed to make a few moves.
Inflation is still too low at -0.1% but off its lows and I think Draghi will stress that he has concerns still but that some improvement should be seen in the wake of recent gains in oil/energy prices. Complacency by him on that one though would be similarly churlish as strong global demand for oil or output freezes are still unlikely to happen in the present scenario.
Draghi should repeat the mantra that they are poised to add more stimulus to its €1.74 trln package if it's needed to meet inflation forecasts currently standing at 1.3% for 2017 and 1.6% for 2019 ahead of the ultimate dream ticket of 2%.
He will focus on the forthcoming TLTRO Mark 2 and the CSPP ( Corporate Sector Purchase Programme ) and assure the markets that these measures will do the required job. In addition we can expect the ECB to be a little more relaxed about the more hawkish talk from the US Fed giving EURUSD a knock lower and taking the steam out of recent rallies.
Add to that recent EURJPY falls to match off against EURGBP rallies and talking of the latter pair we can expect a Brexit-based question or two/three. If Draghi warns of substantial impact on the Eurozone then we could see a real wobble in EURGBP and other EUR pairs but I would expect him to at least try and dodge the bullets in much the same way as BOE's Carney has done under interrogation of his own.
So what levels should we be looking for ? Well EURGBP has decent supply/res into 0.7800-10 with support into 0.7700 and I think that should cover it in essence. EURUSD has large option interest at 1.1100 which should provide support but the order board shows strong supply between 1.1220-50 ahead of more into 1.1300 and 1.1350-80. EURJPY has strong demand into 121.00 and supply into 124.00
ECB Presser: Draghi Expects Low Inflation Near Term
The European Central Bank (ECB) President Mario Draghi arrived at the highly awaited press conference in Vienna, about 45 minutes following the central bank's decision to keep all rates unchanged, matching expectations, especially ahead of its planned longer-term refinancing operations.
Draghi expected the central bank's measures would remain in place for an extended period as they eased the cost of credit amid the very low inflation enviroment.
Speaking in more detail about struggling inflation currently in the euro area, Draghi expected consumer price growth would remain low or negative for several months ahead.
However, the central bank anticipates some pickup in inflation by the end of the current year, while further acceleration is expected during 2017, according to Mario Draghi.
Draghi continued urging for structural reforms within the EU, as their implementation remained inadequate. As a result, economic recovery was seen at a rather moderate pace. On the upside, lower oil prices could boost domestic demand.
As the beginning of new TLTROs loomed, Draghi once again advocated the measures already applied,
and showed ongoing willingness to act further if necessary. Draghi also
spoke about the addition of assets purchases from the corporate sector,
or CSPP, which is due to start in about a week.
When asked about Brexit, Draghi called on the UK to stay within the EU, pointing to mutual benefits, while a potential exit could hamper economic growth. Regardless, the bank anticipated weaker economic expansion during the second quarter.
Speaking about Greece, Draghi said the central bank will require another meeting before
a decision can be taken on Greece rejoining the ECB's refinancing
operations, following a positive bailout review. The ECB decision in February 2015 to stop accepting Greek government bonds as collateral has remained in place, in response to the nation's recent struggles.
When
asked about his concerns over possible bubbles induced by the zero rate
policy, Draghi said that zero rates were surely concerns for savers,
and not only in the EU. Low interest rates can be seen as the sign of
weak economy, but the central bank chose rate levels in order to restore
the economy, he said. Moreover, the ECB has a mandate to keep the price
stability and once recovery is achieved, rates should return to more
normal levels.
Draghi also replied to question about the end of
the €500 note, saying that the decision had nothing to do with the
abolition of cash. The ECB is simply going to substitute the €500 note
with more frequently used €200 notes.
While answering a question from WBP Online regarding withdrawal of deposits due to the period of prolonged low interest rates, Draghi said that he had seen no evidence of deposits being withdrawn due to consumers' loss of patience.
''We have no evidence of withdrawing deposits from the banking system. We actually have opposite evidence from central banks of other countries where interest rates became more negative than they are in the Eurozone. And they don't experience any withdrawal of deposits from the banking system,'' Draghi answered to WBP Online.
WBP Online also asked whether the bank planned to revise its 1% inflation target.
''The ECB position is been basically contrary to revising the inflation rate objective either way and the reasons are different in different cases,'' Draghi replied to the second question. ''Each revision in both sides undermines the credibility of the central bank for different reasons.''
ECB preview: Watch for quantitative easing tweaks
Watch for chances in the 'terms and conditions' of bond buying
The ECB wants to wait and see on the Brexit impact but it's rumored to 'tweak' its bond buying program.
Capital key metrics:
- The ECB can buy up to 70% of an issue of corporate non-bank debt
- The ECB can't buy bank debt
- The ECB can buy up to 33% of a country's (or sovern-like) total debt (from 2s to 30s)
At the start of the month, Reuters reported that the ECB is not considering changing the proportion of debt from each country. They cited 'sources close to the ECB'. The problem is that 25.6% of bond buys must be German but they're running out of debt to buy.
This is a problem that will have to be solved sooner or later. The ECB has bought just over 900 billion euros in bonds. They program is expected to run through March and hit 1.7 trillion -- almost double the current level. In addition, there is growing speculation that bond buying will be increased beyond 1.7 trillion.
The Reuters report said that
'several other changes would be first considered' before mixing up the
ratios including hiking the 70% limit on individual issues and/or
broadening the universe of eligible assets.
The ECB could buy bank debt. That would free up something like 900 billion for purchase but buying bank debt is a risky proposition. Germany along has about 300 billion of bank debt available for purchase.
So it's either buy less German debt, which is a political nightmare. Or 'bailout' banks by buying financial debt, which is an equally big political problem.
EUR Risks Into The ECB
No additional stimulus; focus on UK referendum, Italian banks. We don't expect the ECB to deliver any new monetary policy stimulus this week (21 July). Instead, the UK vote to leave the EU will likely be the key focus, while the issues in the Italian banking system are likely to feature highly as well. The ECB will also have an opportunity to comment on the first TLTRO2 auction (results announced on 24 June) and on its Eurozone Bank Lending Survey for Q2, which will be released on 19 July.
Extension of QE beyond March 2017 seems increasingly likely. While the ECB is likely to argue that the UK vote to leave the EU increases the downside risk to growth and inflation, we do not expect it to deliver substantial monetary easing on 21 July. Instead, we expect the ECB to maintain its 'wait and see' mode and continue to focus on the implementation of its measures from March. Nevertheless, we think the to-be-expected deceleration in Eurozone growth will likely skew the ECB's decision further towards an extension of asset purchases beyond March 2017, with a decision likely due on 8 September or 8 December. In other words, we consider it rather unlikely by now that the ECB would switch off QE in April 2017
EUR will focus on the ECB’s overall signal for direction. Most of the solutions to enlarge the pool of assets available for purchase could result in steeper curves. But, as we discuss, the link between curve steepness and EUR/USD direction is tentative at best. Instead, what matters for the currency is the overall monetary policy signal and whether it leads to a higher level of EUR rates.Market is already quite dovishly positioned, which may imply upside EUR risks
As we discuss, the market is likely already assigning a non-trivial probability to outcomes that lead to a drastic increase in the pool of assets. This has dragged the level of rates lower and equates to a dovish signal. In the absence of strong evidence to this end, however, we think the risks seem to be skewed to the upside for the EUR heading into the ECB meeting on Thursday.
ECB Preview: Focus will be on Brexit and Italian banks say UBS
Latest client note out from the Swiss banking group 21 July 2016
Courtesy of our friends at efxnews.com. Click here for your free trial.
No additional stimulus; focus on UK referendum, Italian banks. We don't expect the ECB to deliver any new monetary policy stimulus this week. Instead, the UK vote to leave the EU will likely be the key focus, while the issues in the Italian banking system are likely to feature highly as well. The ECB will also have an opportunity to comment on the first TLTRO2 auction (results announced on 24 June) and on its Eurozone Bank Lending Survey for Q2, which will be released on 19 July.
Extension of QE beyond March 2017 seems increasingly likely. While the ECB is likely to argue that the UK vote to leave the EU increases the downside risk to growth and inflation, we do not expect it to deliver substantial monetary easing on 21 July. Instead, we expect the ECB to maintain its 'wait and see' mode and continue to focus on the implementation of its measures from March. Nevertheless, we think the to-be-expected deceleration in Eurozone growth will likely skew the ECB's decision further towards an extension of asset purchases beyond March 2017, with a decision likely due on 8 September or 8 December. In other words, we consider it rather unlikely by now that the ECB would switch off QE in April 2017
EUR will focus on the ECB's overall signal for direction. Most of the solutions to enlarge the pool of assets available for purchase could result in steeper curves. But, as we discuss, the link between curve steepness and EUR/USD direction is tentative at best. Instead, what matters for the currency is the overall monetary policy signal and whether it leads to a higher level of EUR rates.Market is already quite dovishly positioned, which may imply upside EUR risks
As we discuss, the market is likely already assigning a non-trivial probability to outcomes that lead to a drastic increase in the pool of assets. This has dragged the level of rates lower and equates to a dovish signal. In the absence of strong evidence to this end, however, we think the risks seem to be skewed to the upside for the EUR heading into the ECB meeting on Thursday.
ECB Minutes: Coeure sees increasing scarcity of some bonds
ECB minutes from the 8 September 2016 governing council monetary policy meeting
- Coeure - Constallation of rates is challenging to QE implementation
- Praet: Any changes to QE has to consider effectiveness for mon pol
- Praet: Sees a lack of a convincing uptrend for inflation
- Governing council can adjust QE at anytime to adopt new measures if needed
- Repeats capacity and readiness to act if needed using all available instruments
- Governing council should not be unduly influenced by market expectations
- Crucial to preserve substantial monetary support
- Downside risks remain, underlying inflation shows no convincing sign of picking up
Even though the taper story came after this meeting, it's remote that they will reduce QE at any rate before March 2017.
ECB Minutes: No Convincing Uptrend For Inflation
The ECB minutes emphasised downside risks to growth and concerns over inflation with no hint that any consideration was being given to an early tapering of bond purchases.
According to the Monetary policy accounts of September’s ECB meeting, staff projections continued to expect real GDP growth to grow at a moderate pace, albeit slightly slower then previously anticipated.
The staff projections contained a sharp downward revision to Eurozone foreign demand, primarily due to the UK referendum. If the immediate UK impact is limited, this suggests cope for an upward revision to the short-term growth outlook, although the ECB also pointed to longer-term risks.
There were also expectations that the inflation rate would pick up, primarily due to the impact of base effects. Underlying price pressures continued to show lack of convincing upward trend and this remained an on-going source of concern.
According to the ECB, the projected inflation path remained conditional on exceptionally supportive financing conditions, which to a large extent reflected the ECB’s accommodative monetary policy.
There were also comments that bank lending would need to be monitored very closely. Although the pass-through of ECB measures to borrowing conditions remained strong, banks faced numerous challenges that might affect pricing and lending decisions.
There were also concerns within the Council that inflation projections might again prove to be over-optimistic and this would pose a further downside risk to baseline projections.
Overall, there was a strong message at the meeting that there had to be no doubt about the Governing Council’s ability to act if needed. There was also a very firm commitment to communicating that the Council stood ready to use all instruments within its mandate to achieve the objective of price stability. The Council considered it important to confirm the commitment that monthly asset purchases of EUR80bn will be maintained until the end of March 2017 or beyond if necessary and in any case until the council saw a sustained adjustment in the path of inflation consistent with its inflation aim.
The overall message in the minutes was broadly dovish in its assessment, especially on inflation. Although the meeting was held in September, it would be very surprising if there has been a surge in optimism surrounding inflation since the meeting. It is, therefore, likely that source references to the potential tapering of bond purchases was aimed at managing longer-term expectations surrounding an exit strategy rather than trying to signal a potential early move to tapering.
ECB commentary and hints will continue to be monitored closely in the short term.
Social media carrying comments form ECB VP Vitor Constancio
- Reports the there's a consensus on tapering is incorrect
- There are absolutely no foundations to all the rumours about the future path of QE
- QE will be ongoing until the inflation is back on a path to target
- I'm very confident that inflation will be well over 1.% by spring
- Overall, our baseline scenario is materialising
Draghi: ECB to reach inflation goal at the end of 2018 or early 2019
Governments know that ECB stimulus won't last forever, ECB President Mario Draghi said Saturday in Washington.
What he didn't say was how long bond buying will last.
An 'ECB sources' story last week from Bloomberg said there was a consensus at the ECB on tapering but didn't give an indication how soon that may come. Other officials have denied the talk but Draghi was mum on the topic.
Instead he focused on growth, which he called steady but moderate. His focus, he said, was on the implementation of monetary policy.
Thanks to ECB policies, he claimed that growth would be an additional 1.3% over three years and inflation 1.4% higher. Since the Spring, he said that global economy had improved but looking ahead he sees significant geopolitical risks.
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With the announcement of extended asset purchasing from March materializing only this June, monetary policy decisions are expected to be frozen for now. Neither the deposit rate, already at a negative -0.40%, nor the main refinancing rate at 0.00% are set to be changed.
Monetary stimulus programs, including asset purchasing extended by corporate bonds and the second round of the Targeted Long-Term Refinancing Operations (TLTRO II), are actually beginning in June and the macroeconomic framework has barely changed since the last meeting in April. The focus at the one and only ECB meeting in 2016 away from the Frankfurt headquarters is set to shine a light on the extent to which these programs and higher oil prices translate into higher inflation.
"While any increase in inflation forecasts on the back of higher oil prices is nothing more than technical normality, it could give rise to speculation about the timing of any ECB tapering. What is more, as such higher inflation forecasts would come at a time at which Fed hike expectations are again flaring up and at which market participants are well aware of German opposition to ultra-loose monetary policy. Nevertheless, in our view any kind of tapering speculations are premature," Carsten Brzeski from ING Bank noted on Monday.
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