From Deborah L Hyde at Bloomberg:
Market expectations for euro-area inflation have fallen back toward pre-ECB QE levels, sparking talk among analysts that Europe’s rate-setters may have to ease further.
Barclays (Cagdas Aksu)
- 5y5y fwd breakevens have cheapened globally over the past few weeks, and sensitivity to the oil price has increased.
- Oil’s fall will likely lead the ECB to lower its inflation projections on Sept. 3 staff projections, especially with EUR/USD struggling to cheapen.
- All of which means the bullish bias in EUR rates is unlikely to disappear as the ECB has little choice but to remain accommodative, if not increase its accommodation at some point.
JPMorgan (Greg Fuzesi)
- The ECB’s tolerance of downside surprises is low and it may step-up rhetoric.
- The ECB had started to go down this route in response to the Greek crisis and it may not take much for.
- It to say that an extension of QE beyond Sept 2016 is becoming more likely.
- If developments point to economic growth weakening as well, the ECB could move more quickly and consider stepping up the monthly pace of its QE purchases.
ING (Petr Krpata)
- The ECB will probably downgrade the CPI forecast given the fall in oil price.
- This will primarily cement the view that QE should be fully implemented until Sept.; for them to increase the program at this juncture, things would have to get really bad.
- Rising probability the ECB will implement QE fully isn’t enough to offset the repricing of Fed’s outlook, hence the EUR/USD rally.
Citigroup (Harvinder Sian)
- The cumulative impact on Europe CPI of a 10% RMB devaluation in 3Q 2015 is fairly substantial at 0.7% and pushes in the direction of lower for longer, at a minimum, but also more ECB easing
- Linkers can find few buyers in this environment and the miss in the market’s expected inflation versus – ECB projections is now too large for ECB credibility
- We think the ECB will not meet its inflation goal by Sept. 2016 and there are technical reasons why QE – will be extended and tapered until 2Q 2017
- ECB QE2 is also feasible.