ECB PREVIEW: Playing Safe With QE Extension, Technical Changes
(Bloomberg) -- The European Central Bank is likely to continue its quantitative easing program for at least another six months at the current pace in its meet on Thursday, though with a risk of a slower level of purchases, strategists say.
- Technical changes are expected including relaxing the deposit rate floor and increasing issuer limits, to reduce the risk of scarcity of government bonds
- Views on the rates impact include a bias toward bear steepeners in core European rates, with Citigroup, Deutsche Bank and BNP all preferring this stance
- The ‘No’ result at the Italian referendum doesn’t play in favor of a reduction of the QE program, according to BNP Paribas; by contrast, Citigroup expects a taper to EU60b a month
- ECB to release new forecasts for CPI and GDP; 2019 inflation forecasts expected below its 2% target
- EXTENSION OF QE
- GOLDMAN SACHS (Lasse Holboell Nielsen): Sees extension to end of 2017 at current EU80b per month pace; a 6- month extension is possible, but a 9-month or longer one would allow the ECB to wait until after the German Federal election to announce any further extensions into 2018 if necessary
- CITIGROUP (team including Harvinder Sian): 6-month extension and a taper from EU80b to EU60b
- NOMURA (Anna Titareva, Christophe Duval-Kieffer): Sees 6-month extension at EU80b; the weakness in core inflation dynamics and significant downside risks to the growth outlook continue to suggest a need to maintain the existing level of policy accommodation
- BARCLAYS (team including Cagdas Aksu): 6-month extension at EU80b
- RBS (Giles Gale, Anna Tokar): Base case is for ECB to extend QE to end-2017 at current pace of EU80b per month
- DEUTSCHE BANK (Mark Wall, Marco Stringa): 6-month extension at EU80b
- RBC (Peter Schaffrik, Cathal Kennedy): Expects QE extension of 6 months at EU80b per month to at least September 2017
- BOFAML (team including Ralf Preusser): 6-month extension at EU80b per month with minor tweaks to the capital key
- CREDIT SUISSE (Anais Boussie): 6-month extension at EU80b a month
- JPMORGAN: Extension for 6 months at EU80b
- TAPERING RISKS
- GOLDMAN SACHS: The recent sell-off in global rates has reduced the scarcity of government bonds eligible for purchase; monthly deviations from the EU80b target will become more frequent in 2H half of 2017; pace of purchases will depend, to some degree, on the evolution of yields
- CITIGROUP: Expects a taper to EU60b; “cannot see the hawks walking away with nothing and signals of deep divisions in the Council play into this risk, helped by staff projections that should show inflation nearer 2% in 2019”
- NOMURA: Balance of risks remains skewed toward an asset purchase extension but at a slower pace
- BARCLAYS: a cautious approach should prevail; following the recent sharp rise in core and peripheral yields ECB will not likely want to add more fuel to the EGB market nervousness and further tighten financial conditions
- RBS: Sees 20% chance of EU80b per month for shorter period, 20% chance of EU60b per month for 9 months, 10% chance of EU60b per month for shorter period
- DEUTSCHE BANK: Says “too soon to taper”
- RBC: Doesn’t see any meaningful hint with regards to tapering; new set of staff forecasts unlikely to show a return to the ECB’s inflation target before 2019, expect ECB to firmly come out in favor of more easing
- MORGAN STANLEY: Italy’s instability will make it difficult to lay out a calendar-driven QE tapering schedule
- BNP PARIBAS: ECB announcing a scaling back of asset purchases is now less likely after the ‘No’ vote; a change in forward guidance in order to give some sort of signal to the markets that QE can’t continue indefinitely in the current form is instead more probable
- TECHNICAL CHANGES
- GOLDMAN SACHS: Relaxing the capital key weight constraint will occur eventually, but probably not in December
- CITIGROUP: ECB likely to drop the deposit rate floor as a hard reference for bond buying and perhaps also increase issue limits above 33%
- NOMURA: An increase in the issuer limits for non-CAC bonds from the current 33% to 45%
- BARCLAYS: Expects substitution option for Germany, removal of the yield floor and relaxation of the issue share for non-CAC bonds as the most likely parameter changes
- RBS: Expects the issue and issuer limits to be relaxed to 50%; 2019 projections likely to show inflation still below target; look for 2018 to be downgraded from 1.6% to 1.5%
- DEUTSCHE BANK: Temporal extension might be complemented by a a removal or softening of the yield floor
- RBC: ECB will accept depo rate floor can be violated; expects hints that more flexibility will be available in the case that the 33% issuer limits are breached; sees more pro-active securities lending program to alleviate some of the most extreme distortions in the repo market
- BOFAML: Sees ECB raising non-CAC limit to 50% and using EU supra substitutes; addressing repo issues should be top of the ECB’s priority list, expect changes to repo to solve the richness of general collateral, which would make the 4y sector on German curve available for purchase; repo issues have to be addressed at some point, suggests going short schatz vs bunds (all vs OIS)
- CREDIT SUISSE: Sees reduction in the constraint of buying below the depo rate; increase in the 33% issue share limit, most likely to 50% at least for highly rated bonds; a move away from the capital key allocation in a way that mitigates German criticism
- INFLATION FORECASTS
- DEUTSCHE BANK: The 2019 HICP forecast could be 1.7%, not quite on target
- JPMORGAN: The new staff forecasts will show inflation below target in 2019 at 1.6%
- GOLDMAN SACHS: The new inflation forecast for 2019 will probably be around 1.7%
- MARKET VIEWS
- DEUTSCHE BANK: “A tapering that isn’t justified by the inflation outlook would risk a more disorderly impact on financial conditions, for example, through an appreciation of the currency”
- CREDIT AGRICOLE: recommend buying EUR/USD at 1.0720 with a stop of 1.0450 and a target at 1.1080; see a high risk of EUR upside related to position squaring; says this is especially true should the ECB fail to exceed already dovish market expectations this week
- RBC: Short-end cash yields expected to remain well protected, sees schatz rallying further; this should support curve steepening, widening of UST/bund spread
- CITIGROUP: Stay bearish on bunds while the depo floor removal and its associated lower maturity of purchases should lead to steeper German 10s30s
- BARCLAYS: Sees good risk/reward in long 5y5y fwd Italy vs Spain, as well as long 5s/10s/15s Italy and France trades into the ECB meeting; also sticking with 10s/30s Ireland steepeners and long bund ASW vs EONIA trades
- BNP PARIBAS: Markets may be anticipating that the calm response to the weekend’s political events will encourage the ECB to emphasize the limits to its QE intentions or cut back the pace of purchases; EUR/USD may struggle to extend upside much beyond 1.08
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Anais Boussie (Credit Suisse Group AG)
Anna Titareva (Nomura Holdings Inc)
Anna Tokar (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Cathal Kennedy (RBC Europe Ltd)
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