With the ECB’s press conference in less than an hour, here are the thoughts of Mark Cudmore, a former FX trader who writes for Bloomberg
The ECB today will try to provide something for all the market animals -– bulls, bears, hawks and doves -– but ultimately none of them will feel completely sated. The euro will whip around in reaction but it won’t find a new trend.
Most importantly, Draghi will make clear that tapering has not yet even been considered. He will emphasize that the program runs until March, at least, and so they have plenty of time to plan the exit. There’ll be no taper-tantrum today.
Far from tapering, it’s likely that the Asset Purchase Program will be prolonged even further beyond March, although perhaps not formally so at this meeting. An extension will require technical adjustments that may need more time to work out.
The inflation and economic outlook make clear that it’s too early to abandon the QE program unless the ECB has completely lost faith in its efficacy, and there’s no sign that has happened.
Consensus forecasts put both GDP growth and consumer price inflation at 1.3% in the euro zone in 2017 -– neither figure suggests officials should be close to declaring “mission accomplished.”
Draghi knows this and is likely to ensure a dovish slant to the conference. Guidance toward future QE extension is probable but unlikely to be explicitly detailed.
No matter how optimistic many analysts are getting on Europe, the fact is that there are two very large near-term risk events that overshadow the region: the Italian constitutional referendum and Brexit negotiations.
So expect no tapering, no further easing (yet), and a dovish conference. The euro may drift lower in reaction, but there won’t be enough sustenance from today’s ECB offerings to keep a trade going a week from now.
Also, for those who missed our preview of the ECB’s decision, here is a handy recap courtesy of Bloomberg of the key checklist items to keep an eye on in today’s announcement and conference:
ECB President Mario Draghi’s conference will be watched for signs on the future direction of policy as most economists see Europe’s central bank leaving policy unchanged for a second consecutive meeting. A flurry of political risk events over the coming months, and a new global focus on fiscal policy, means Draghi needs to reassure market players the ECB has more ammunition as well as laying to rest the taper talk that spooked bond markets this month. Investors will watch Draghi’s press conference at 2:30pm CET for signals on the possibility QE could be tweaked and extended.
QE EXTENSION, TWEAKS
- Executive Board member Sabine Lautenschlaeger said at the end of September the policies that are already in place need to be given time to work through to the real economy and no additional stimulus is needed at present
- At the last meeting Draghi said the ECB tasked committees to evaluate the Bank’s optionsl The Bank will add new policy measures at its final 2016 meeting, according to a Bloomberg survey
- Nearly 4/5 of economists surveyed expect the ECB to add further stimulus at some point and 97% of those expect an extension past March 2017, with December seen as the most likely timing for any announcement
- As well as extending the program, changes could include dropping the maturity limits, lifting issue limits or allowing NCBs to buy bonds with yields below deposit rate
- Tweaks could be announced as soon as today, some economists say
TAPER
- Governing Council hasn’t discussed winding down the pace of its monthly bond buying, ECB media officer Michael Steen tweeted
- The comments came after a Bloomberg article on Oct 4 said there’s an informal consensus that asset buying will have to be tapered once a decision is taken to end QE
- GC member Ewald Nowotny said officials are monitoring developments, in particular inflation, and ECB will “slowly and carefully” reduce asset purchases once the time has come
- Analysts at Barclays say it’s very likely Draghi will be questioned on this during the Q&A but say the GC is unlikely to discuss tapering today
BOND SCARCITY AND THE CAPITAL KEY
- Some policy makers are said to prefer bond purchases being more aligned to levels of outstanding debt; most analysts agree this is politically difficult and the least likely option
- In any case, the ECB has already been quietly exceeding quotas depending on where bonds are available, and the recent move in bond yields means the number of eligible bonds has increased
DEPOSIT RATE
- Given the impact of negative rates on bank profitability, the investment community thinks central banks are approaching the lower bound on rates and will increasingly focus on alternative forms of easing
- Cutting rates further would come with increasing risks, ECB Executive Board member Yves Mersch said this month
- The longer interest rates remain low, the more pronounced the negative side effects will become, he said
- Any deviation from the phrasing that the GC expects rates at current or lower levels for an extended period of time and well past the horizon of the ECB’s net asset purchases will be key
BREXIT
- Draghi may be asked about the GC’s current thinking about the likely impact of Brexit on euro-area growth, given the apparent hardening of the stance on both sides of the channel but relatively resilient data
- At the end of September, he told the European Parliament the extent to which the economic outlook will be affected depends on the timing, development and final outcome of the upcoming negotiations
CSPP
- ECB may extend the program at some point by buying bonds issued by financials, though few expect any detail on that yet given the program only began this summer
FISCAL POLICY
- “In a world of very low interest rates, monetary policy cannot be the only game in town –- and we should not pretend it can be,” ECB’s Mersch said at Harvard University this month
- That echoes comments from Draghi in September that other policy areas must contribute much more decisively to reap the full benefits from monetary policy measures
- A shift toward fiscal policy would have an important implication for asset prices, so while Draghi may continue to ask governments to step up structural reforms he will likely balance that with reassurance that the Bank will do more too, if needed
INFLATION
- Where the bank expects inflation to be at the end of its forecast period is a key factor in how the Bank will proceed
- Any update on Draghi’s comments that the ECB will reach its inflation goal by end-2018 or early 2019 linked to stimulus will be another key part of today’s communication
GREECE
This week, Kathimerini newspaper reported that the Bank’s initiative to find a commonly acceptable solution to Greek debt relief issue is under way, citing an unidentified bank official
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