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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

ECB QE Amount came Above Expectations with Low Risk Sharing and Legal Headwinds

The ECB unveiled a bigger than expected QE plan that will involve buying €60B a month including government bonds, covered bonds and ABS but excluding corporate bonds. The program scheme will begin in March and last until the end of September 2016; or “until the ECB sees a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2 per cent”. Therefore, it implies at least €1140B of purchases (19 x 60) so that the ECB balance sheet will exceed its 2012 top level in Sept. 2016 (previously than investors expected).

 

 

 

Assuming €10B a month of  ["covered bonds" + "ABS"] purchases, it implies €50B/ a month of sovereign bonds. In other words, in 2015, sovereign purchases should reach €500B which is almost 56% of Eurozone gross issuance and 2.3 times the net issuance. Through September 2016, the total amount of sovereign purchases would rise to €950B and will be based on the Eurosystem NCBs’ shares in the ECB’s capital key (and won’t exclude Greece).  Note that for Germany, the table shows that purchases through the end of 2015 will reach €129B which is more than 20 times the amount of the net issuance scheduled for 2015.

 

 

Moreover, the maturities of sovereign bonds purchased will range between two and 30 years and could offer negative yield.

 

However, after strong pressure from German and Dutch officials, national central banks will assume most of losses from any default or restructuring of their national debt, breaking with the tradition set by previous sovereign bond-buying schemes. There will be risk-sharing on only 20% of the assets, largely debt issued by European institutions bought by national central banks.

 

Finally, also on the negative side, the ECB QE is already facing legal headwinds in a context where the FT reported that:

 

Peter Gauweiler, a conservative MP who has launched multiple legal actions against the common currency, announced on Thursday that he had instructed a law professor to prepare a case against the QE programme.”

While government ministers refrained from comment, Werner Langen, a leading European Parliament member of Chancellor Angela Merkel’s conservative CDU, went on morning television to attack QE, saying: “This is wrong, it does not help, it is not the right instrument [ to aid economic recovery]. The ECB has reached the end with its monetary policy.”

 

Moreover, within minutes of Draghi’s announcement, deputy chancellor Hans Michelbach asserted that the ECB was “violating its mandate” while several hours later, Ifo economic institute President Hans-Werner Sinn says ECB’s bond-buying decision is “illegal and unsound state financing through the money-printing press.”

 

All in all, Draghi reassured investors by choosing both a monthly and a total amount above the consensus, including Greece and a large choice of maturities. Separately, in order to ease pressure from German and Dutch officials, he decided to cap risk-sharing on only 20% of the assets. However, it’s clear that it’s not sufficient and the QE is far from being implemented.

Beige Book: Activity Slowed In About A Third Of The Country

FOMC published Beige Book which shows that,  during the reporting period of September through early October, activity slowed in about a third of the country mainly because of an increase in uncertainty due to the federal government shutdown and debt ceiling debate.

 

A few excerpts from the Fed classified by theme:

 

1/ Sum up
- Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest to moderate pace during the reporting period of September through early October. Eight Districts reported similar growth rates in economic activity as during the previous reporting period, while growth slowed some in the Philadelphia, Richmond, Chicago, and Kansas City Districts. Contacts across Districts generally remained cautiously optimistic in their outlook for future economic activity, although many also noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate.
 
2/ Consumption
- Consumer spending grew modestly in most Districts. Auto sales continued to be strong, particularly in the New York District where they were said to be increasingly robust. Growth in retail sales was steady in most of the Districts, but picked up some in Cleveland and Richmond and slowed in Chicago, Kansas City, and Dallas. Contacts in Chicago and Atlanta noted that back-to-school spending was lower than a year ago. However, retailers generally remained optimistic about the holiday shopping season.
 
3/ Manufacturing
- Overall, manufacturing activity expanded modestly in September, but with some notable exceptions among the Districts
 
4/ Nonfinancial Services
- Demand for nonfinancial services increased modestly from the prior reporting period.
 
5/ Real Estate and Construction
- Construction and real estate activity continued to improve in September.
- Residential construction increased moderately on balance, growing at a stronger pace in the Minneapolis and Dallas Districts but only slightly in Richmond and Philadelphia.
- Multifamily construction remained stronger than single-family construction in a number of Districts.
- Nonresidential construction activity remained modest, but varied by market and District.
 
6/ Banking and Finance
- Financial conditions were little changed on balance from the prior reporting period.
- Overall loan growth remained modest in most Districts.
- Consumer loan demand weakened slightly.
- Reports on mortgage lending were mixed.
 
7/ Employment and wages
- Employment growth remained modest in September. Several Districts reported that contacts were cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally.
 
8/ Inflation
- Price pressures remained limited in September. Most Districts reported only slight increases in commodity prices and limited ability to pass through these increases to their customers.

 

My view
 
It shows little change from last report. The pace of growth remains historically weak as it keeps on expanding at a modest to moderate rate. However, activity slowed in about a third of the country. Employment growth remains modest due to uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally, while inflation stays subdued. On the positive side, we can note that real estate activity continued to improve and in the meantime consumer spending grew modestly.

After “Government Shutdown”, the Fed Will Not “Taper” Until at least December

This morning, the U.S. government began a partial shutdown for the first time in 17 years which will put as many as 800,000 federal employees out of work. Moreover, according to IHS, partial shutdown would cost U.S. at least $300 million/day in lost economic output (0.002% of real GDP) at the start.

 

More from Bloomberg:

 

A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.
 
While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.

 

The impact on the economy will be minimal if the shutdown is short, however, the risk is that the debate could drag on until October 17th (Treasury deadline).

 

In this context, the Fed will maintain a very accommodative policy letting its asset purchase program unchanged at least until December meeting (December 17-18). Indeed, it is very unlikely that Fed will start “tapering” at the October meeting (October 29-30) for several reasons:
 
1/ Inflation remains particularly low and well below Fed’s target:
* PCE Core inflation and PCE inflation were revised downward in Q2 from 0.8% (QoQ Annualized) to 0.6%.
* PCE Deflator YoY WAS 1.2% in August and was revised downward in July from 1.4% to 1.2%.
* Prices for gasoline on the New York Mercantile Exchange have fallen roughly 11% in September.
 
2/ Growth will remain sluggish:
* Fiscal issues were already weighing on companies’ expectations as the BRT (Business RoundTable) third quarter CEO Economic Outlook Survey fell to its lowest level since Q4 2012.
* The latest figures suggest that Q3 GDP, which will be published on October 30, will be slightly below 2% (QoQ Annualized).

 

3/ Jobs report and other economic reports will be delayed or cancelled according to Reuters. Without figures which sow a significant improvement concerning labor market, the Fed will not “taper”.
 

The United States will stop publishing much of its economic data next week if the government shuts down, including the closely watched monthly employment report, officials said on Friday.

 

4/ Given the recent trend in inflation, growth and the fact that employment report will be delayed or cancelled, Fed members’ speeches (voters) since last FOMC suggest that “Octaper” is unlikely:
 
* On September 18 – Fed Chairman Bernanke (dove, FOMC voter) / There is no fixed calendar for tapering, it could begin this year, depending on data. – FOMC press conf
- Fed to maintain highly accommodative policy.
 
* On September 20 – Fed’s Bullard (moderate, FOMC voter) / GDP is tracking below 2%, thought it would be higher at this point – speech in New York + comments
- Removing accommodation when inflation is below target is concerning. Fed must hit inflation targets.
- Want to see a recovery in inflation before adjusting stimulus program, inflation is expected to rise over the upcoming quarters.
 
* On September 23 – Fed’s Dudley (dove, FOMC voter) / Reiterates that Fed policy will continue to be driven by incoming economic data – speech in New York City
- Fiscal uncertainty is one issue impacting the schedule for exiting QE, along with market interest rates and less good data.
 
* On September 26 – Fed’s Stein (dove, FOMC voter) / US still requires accommodative policy – speech in Frankfurt
 
* On September 27 – Fed’s Evans (dove, FOMC voter) / Needed to defend inflation from below as well as above – comments from Oslo
- Tapering could start in Oct, Dec, but could be pushed to Jan.

 
 

All Fed members’ speeches concerning QE and economic activity since the last FOMC meeting (September 17-18) are available here.