Halister News

(Bloomberg) -- Some investors see Thursday’s ECB decision as one of the “most difficult meetings to call,” even as they expect President Mario Draghi to deliver a substantial package of easing measures.

• These may feature any combination of a deposit-rate cut, an increase in monthly asset purchases and a change in the QE program’s current conditions
• Rate decision at 1:45pm CET; press conference at 2:30pm CET
  • Press conference will be eyed for any comments on negative rates and details on any new measures; investors will watch for updates to growth and inflation forecasts, following the recent drop in core CPI
• NOTE: Draghi’s Jan. 21 opening remarks, Q&A here; accounts here

• DEPOSIT RATE
  • A further cut in the ECB’s -0.30% deposit rate is expected by 37 of 38 economists surveyed by Bloomberg; 29 see a 10bps decrease to -0.40%, while 8 project an even deeper cut to -0.50
  • Eonia forwards pricing a ~12bps cut today, and a further ~10bps decrease in September
  • Executive Board Member Coeure said last week the ECB is monitoring risk that negative rates will hurt bank profitability, while sticking to price-stability commitment first
  • BIS said this week central banks’ negative rate policies are working so far, though there’s uncertainty over transmission mechanisms if they were to drop further below zero

• QE EXTENSION, EXPANSION
  • Of 59 economists surveyed by Bloomberg, 43 expect the ECB to boost the amount of monthly bond purchases from the current EU60b; 21 also see the program duration to be extended beyond March 2017
  • Some analysts cite a removal of the yield floor for QE purchases, or an expansion of eligible assets among other possible options
  • Any discussion of dropping the capital key for asset purchases not seen as likely at this stage; would be seen as a dovish surprise

• INFLATION FORECASTS
  • ECB staff projections for inflation are expected to be revised lower again, after they were cut in Dec.
  • Advanced figures on Feb. 29 showed the euro-area’s Feb. core CPI y/y dropped to 0.7% from 1.0% previously; vs est. 0.9%
  • Draghi said last week “euro-area inflation dynamics continue to be weaker than expected,” echoing remarks in Jan. saying the inflation path this year is significantly lower

• RISK OF DISAPPOINTMENT
  • Market participants have refrained from taking large short positions in EUR vs USD ahead of today’s decision, in fear of a repeat of disappointment in the aftermath of Dec. meeting
  • Traders say EUR short positioning vs USD is expected to be lighter compared with Dec.
  • Leveraged funds’ net EUR shorts are well below the highs seen three months ago, CFTC data show

• GLOBAL RISKS
  • Any comments on the impact of global developments including the oil-price slump and Chinese growth slowdown will be eyed
    • China announced a growth target range of 6.5% to 7% this weekend; compared with 6.9% expansion in 2015, slowest pace in 25 yrs
    • G-20 communique last month cited a potential U.K. exit from the EU and the refugee crisis among key risks, in addition to the large drop in commodity prices
  • Bundesbank President Weidmann said on Feb. 27 that ECB should “look through” the impact of energy prices on headline inflation