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ECB PREVIEW: Draghi May Signal More QE as Forecasts Cut – Bloomberg

From Deborah L Hyde at Bloomberg:


Draghi is likely to say the central bank stands ready to do more at this week’s press conference, as inflation remains low after nearly six mos. of a bond-purchase program that’s meant to revive it, analysts write in published research.


JPMorgan (Greg Fuzesi)

- The main change in forecasts will come from oil prices, which lowers the predicted path for inflation over the next 12 mos.; expect 2017 est. to remain unchanged at 1.8% y/y with some risk of 1.7% y/y
- If mkt conditions and EM prospects don’t improve, easing in Oct. or Dec. would become a real possibility

Barclays (Philippe Gudin and Antonio Garcia Pascual)

- Expect ECB Draghi to maintain accommodative stance and insist that GC still has tools available should monetary and financial conditions tighten further
- Expect ECB to announce further easing before yr-end


Nomura (Nick Matthews and Norbert Aul)

- The risk of further ECB action as early as this week has clearly increased; while not the baseline case the likelihood of a surprise is elevated
- One tweak GC may be discussing is the 25% limit on buying, given originally said this initial cap would be in place for 6 months
- Too early for GGB collateral waiver

BofAML (Analysts led by Gilles Moec)

- Avoiding more euro re-appreciation is the N-T priority and “talking dovish” will likely be the ECB’s first port of call; given real economy data and Fed outlook uncertainty, hard to take action this soon
- Further out, China’s impact on consumer prices will matter more than growth effect and saying QE will continue beyond Sept.2016 would be a powerful form of forward guidance

Goldman Sachs

- Expect no change of stance but the statement and Draghi’s remarks will probably have a dovish undertone
- Expect GC to acknowledge uncertainty and echo comments in July that the ECB would respond by using all instruments available within its mandate

Deutsche Bank (Peter Sidorov, Marco Stringa, Mark Wall)

- While proprietary Financial Condition Index has tightened sharply in past few weeks, bank credit, static growth, lower oil prices are among reasons to keep policy steady
- Expect 2017 inflation forecast to be revised marginally lower
- Further out, capital outflows from China or falling FX reserves could weigh on the euro or EGB yields
- Expect the ECB to reiterate its readiness to act, if necessary

RBS (Giles Gale)

- Staff forecasts for inflation will be revised down for 2015, and probably for 2016; doubt end-2017 will slip this time
- Now is not the time for QE-extension but it’s coming soon

Morgan Stanley (Elga Bartsch)

- ECB likely to stress its easing bias; unlikely will take any tangible policy actions, although can’t be ruled out completely
- Expect staff to lower GDP projections to 1.25% and 1.75% vs 1.5% and 1.9%, reflecting lower-than- expected growth in 2Q and somewhat higher EUR/USD exchange rate

Market Securities (Christophe Barraud)

- ECB is unlikely to change its monetary policy stance as early as this meeting although dovish tone should stay
- Further non-conventional measures are unlikely although can’t be completely ruled out
- If it does make any changes, could alter the list of eligible agencies, change the 25% purchase limit on individual issues; will likely discuss the waiver for GGBs

RBC (Timo del Carpio)

- The GC’s dovish slant will probably remain fully intact even as the economic backdrop should encourage the ECB to leave policy unchanged
- Leaving the door open is very different from actively preparing a change of stance and recent remarks from GC members suggest a “wait-and-see” approach will prevail
- Since effects of easing still need time to feed through to the real economy, arguing for verbal intervention likely to be the primary means of cementing expectations

UniCredit (Marco Valli)

- Draghi likely to sound more dovish than he did in July; don’t expect any explicit hint that central bank is reconsidering policy stance, though door for further stimulus remains wide open
- Fall in Brent crude prices may push inflation forecasts to 0.1%-0.2% in 2015 (prev. 0.3%), 1.2%-1.3% in 2016 (prev. 1.5%), and to 1.6%-1.7% in 2017 (prev. 1.8%)
- Uncertainty over ECB’s baseline growth scenario to increase, given doubts over health of global trade; expect Draghi to respond with “strong commitment” to ease further if price stability appears threatened

ABN Amro (Nick Kounis)

- Drop in oil prices, which will keep headline CPI lower for longer, is a key factor behind rising risk of action from ECB as soon as this week, Nick Kounis, economist at ABN Amro, says in client note
- Sees now much bigger risk that ECB will step up QE as soon as Sept. meeting; see probability of action at ~40% Draghi expected to step up dovish rhetoric

Downside Risks Weighted on Chinese Stocks

Chinese equities markets were down as worries over the credit crunch in China continue to weigh on regional sentiment. Despite the second consecutive session of lower lending rates (7-day repo was down 230bps below 7%) and PBOC commentary reassuring investors (PBOC will implement “Fine-Tuning” policy in the short term), Shanghai Composite was  down nearly 5% and Hong Kong off by 2.0%, lowest levels since December and Sept of 2012 respectively. even though short-term lending rates are moving lower, they are still well above the levels seen just a few weeks ago and, moreover, the damage on the speculative property sector would be lasting. Even if short-term lending rates were moving lower, they are still well above the levels seen just a few weeks ago and that will penalize small banks according to Moody’s:


China’s worst cash squeeze in at least a decade may weigh on smaller banks’ financial strength as their reliance on interbank funding leads to an erosion of loan margins, according to Moody’s Investors Service. Mid-sized banks got 23 percent of their funding and capital from the interbank market at the end of last year, compared with 9 percent for the largest state-owned banks, Moody’s said in an e-mailed statement today. Those banks will probably compete “more aggressively” for deposits amid the credit crunch, which would increase cost of funds, it said.


Moreover, Goldman Sachs and CICC chose to cut their forecasts regarding growth:

Goldman Sachs became the latest bank to downgrade China’s economic growth on Monday, saying tighter financial conditions and reforms are downside risks for the world’s second largest economy. The bank cut China’s gross domestic product (GDP) growth forecast for the second quarter to 7.5 percent on the year from 7.8 percent previously. It also revised full-year growth estimates to 7.4 percent for 2013 and 7.7 percent for 2014, from 7.8 percent and 8.4 percent, respectively. The official growth target for the year is 7.5%.


China’s growth rate next year will probably drop to 7.3 percent, according to a report released by the China International Capital Corp Ltd on Monday. The government will likely cut growth targets for 2014 to 7 percent, compared with this year’s 7.5 percent, it said. CCIC hiked its forecast of M2 growth, a broad measure of money supply, to 14 percent for this year, but said the pace would moderate to 13 percent in 2014. And new yuan loans extended by commercial lenders next year will stand at 9.9 trillion yuan ($1.61 trilion), it added. The company maintained its GDP growth forecast for 2013 at 7.7 percent, while it cut the inflation rate forecast to 2.6 percent.


Finally, Chinese Beige Book confirmed the growth slowdown in Q2:


The latest China Beige Book showed fewer retailers reporting revenue growth along with a “sharp” pullback in service industries. An increased number of retailers said at least 60 percent of sales were to consumers.

Capital spending rose in transportation and was unchanged in manufacturing while weakening in retail, services, real estate and mining, according to the report. The property market cooled, while the labor market was “stable,” China Beige Book said.

Interest rates on loans averaged 7.10 percent, up 34 basis points from the previous quarter, while bond yields of 7.11 percent were up 80 basis points, the report said.