Halister News

(Bloomberg) -- ECB President Mario Draghi said the Governing Council didn’t discuss extending QE nor tapering purchases even as he asserted there won’t be a sudden end to the program.

• NOTE: Draghi’s opening remarks; introductory remarks and Q&A in September here; account of most recent meeting
• Euro spikes on Draghi’s remarks QE extension wasn’t discussed, reverses to near 4-month low at 1.0935 as he reaffirms the need to preserve substantial monetary support; bund curve flattens, swap spreads tighten as scarcity not addressed

QE EXTENSION

• Draghi says QE will run through March 2017, or beyond if needed; extension wasn’t discussed at this meeting
• Remain committed to preserving a very substantial degree of monetary accommodation
• Will continue to act if warranted by using all instruments available within ECB’s mandate
• GC’s assessment in December will benefit from new projections extending to 2019

TAPER

• GC didn’t discuss tapering or the horizon for quantitative easing
• Extraordinary policy support won’t exist forever
• While ending QE abruptly wasn’t discussed by GC, an abrupt ending to bond purchases is unlikely
• A sudden stop isn’t on anybody’s minds and it’s not something that people naturally contemplate

BOND SCARCITY, THE CAPITAL KEY, OTHER TWEAKS

• One area that was discussed was what the ECB should do if confronted with shortage of bonds in some jurisdictions
• While much of the discussion was how to overcome scarcity if it were to become a problem, it’s not a problem now
• QE continues to run smoothly, corporate bond purchases exceed expectations
• Didn’t discuss stock-flow issue of QE

DEPOSIT RATE

• GC briefly discussed negative rates
• No evidence that they hinder the transmission of our monetary policy
• Low rates work
• Recent Bank lending Survey shows net loan demand continues to increase, continued to ease for households, unchanged for non-financial companies
• Credit volumes have recovered since beginning of 2014; there’s other important evidence in M3 data: the largest contribution to M3 comes more and more from non-government sectors, which shows ECB policy is being transmitted effectively to economy

FISCAL POLICY

• Fiscal policies should also support economic recovery, while remaining in compliance with EU fiscal rules
• Full and consistent implementation of the stability and growth pact over time and across countries remains crucial to ensure confidence in the fiscal framework
• Still, all countries should strive for a more growth- friendly composition of fiscal policies
• Economic recovery in the euro area is expected to be dampened by still subdued foreign demand, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms
• Risks to euro-area economy remain tilted to the downside
• Implementation of structural reforms needs to be substantially stepped up; reforms are necessary in all euro area countries
• Adequate infrastructure is vital to boost investment and jobs

INFLATION

• Inflation continues moderate, steady recovery and gradual rise in line with previous expectations
• No signs yet of a convincing upward trend in underlying inflation
• Supported by monetary policy, inflation will rise further in 2017 and 2018
• Financing conditions reflect expectations that this support will remain in place

GREECE

• Discussions about debt sustainability in Greece are continuing and we’ve expressed concerns
• Measures have to be undertaken to address this problem
• When the time comes we will assess debt sustainability; premature to speculate about purchasing bonds till then

INEQUALITY

• Study by Bundesbank shows by and large policy doesn’t increase inequality; main source of inequality is unemployment
• If you buy assets from people who are wealthy, in short run you certainly increase inequality
• But policy also reduces unemployment, reducing inequality

(Bloomberg) -- A long easing cycle is still on the table even after BCB statement showing cautiousness on inflation services and starting the rate cuts with a move smaller than that expected by part of the market, analysts say.

• Inflation closer to target and reforms progress may allow BCB to cut Selic rate by more than 500bps by beginning of 2018, Marcelo Carvalho, chief-economist for Latam at BNP Paribas, says in a phone interview
  • Entire cut cycle may lead Selic to 9%, which would still be a ’’very high’’ rate compared to CPI already near 4.5% in the market forecasts for 2018
• BCB’s cautious outlook creates a doubt on previous market bet that rate cut would speed up to 50bps in November from 25bps in October, Rodrigo Melo, chief-economist at Icatu Vanguarda Administracao de Recursos, says
  • Acceleration of the pace depends on next CPI figures in Oct. and Nov. showing services inflation slowing for a level seen as comfortable by BCB; also next spending cap bill votes in Congress may also be key
  • “As being more prudent now, BCB increases the chances to cut more in the future,” Melo says
• While the chances of BCB keeping the 25bps cut pace in Nov. have increased, it does not close door to 50bps depending on the developments, Mauricio Oreng, senior-strategist at Rabobank Brasil, says
  • BCB has adopted a cautious tone consistent with the remaining uncertainties
• DI rates today show adjustment in short and medium-end curve, reacting to BCB statement; long-end curve favored by perception that more cautiousness now benefits a disinflation process in the future, Carlos Kawall, economist at Banco Safra, says
• NOTE: DI rates rally from Nov. 16 to Jan. 21 contracts after BCB on Wednesday cut Selic by 25bps, citing services prices among main risks for the bank fight against inflation; longer contracts from Jan. 22 to Jan. 27 drop

--SARAH KOPIT

Economic Release Details: {LEI CHNG Index ECOD} --SCOTT LANMAN

(Bloomberg) -- Relative underperformance of gilts vs bunds continues with spread widening briefly past 200-DMA at 107bps; only a close above here would put in place fresh widening momentum to 118bps Fibonacci hurdle and head-and-shoulders measured target, Bloomberg technical analyst Sejul Gokal writes.

• See chart here
• Spread, now at 107bps vs 109bps wide
• Any material narrowing back below level today could trigger further tactical spread compression to unwind overbought conditions; support at 101bps, 98bps and 93bps
• Oct. 10: Relative underperformance of gilts vs bunds may extend

• NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.