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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

Deflation Fear Spurs Talk of More ECB QE – Bloomberg

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.


The ECB QE will be between €600B and €1.1T – Bloomberg, WSJ, FT

Several articles coming from Bloomberg, WSJ and FT unveiled details concerning the ECB QE announcement:


1/ According to the WSJ, the bond purchases would reach €50 billion per month that would last for a minimum of one year, which implies a total of €600B (lower bound):


A proposal from the European Central Bank’s Frankfurt-based executive board calls for bond purchases of roughly €50 billion ($58 billion) per month that would last for a minimum of one year, according to people familiar with the matter.
Still, the executive board’s proposal indicates that the ECB could move more aggressively than financial markets have expected. Forecasts among analysts have recently centered on a figure of around €500 billion or higher for a quantitative-easing program, but the executive board’s proposal suggests that bond purchases could amount to at least €600 billion.


2/ According to Bloomberg, ECB proposal circulated to Governing Council foresees asset purchases of €50 billion a month through the end of 2016. Purchases would not start before March which means that the higher bound would be €1.1 trillion:


The ECB president and his Executive Board recommended asset purchases of 50 billion euros a month until December 2016, according to two euro-area central-bank officials.
Purchases of sovereign debt or other assets in addition to the ECB’s existing covered-bond and asset-backed securities programs wouldn’t start before March 1, one of the people said. It hasn’t yet been decided if the target of 50 billion euros a month would include the existing programs, or how much of it would be sovereign debt.


3/ Finally, the FT confirmed the first headlines noting that the ECB is mulling buying around €50 billion-worth of government bonds a month for between one and two years as part of its quantitative easing programme set to be unveiled on Thursday.

The European Central Bank is mulling buying around €50bn-worth of government bonds a month for between one and two years as part of its quantitative easing programme set to be unveiled on Thursday.
The proposal implies the ECB will buy at least €600bn-worth of government bonds, and possibly as much as double that if it continues buying for two years.

ECB PREVIEW: Sovereign QE Imminent; Size, Risk-Sharing in Focus – Bloomberg

Bloomberg made a review of economists’ views ahead of the ECB meeting:


Morgan Stanley
- Expect ECB to embark on sovereign QE and announce government bond purchases of EU500b and private sector asset purchases of EU100b, economists including Elga Bartsch say in Jan. 19 note.
- A negative deposit rate makes it difficult for ECB to meet its target merely through funding facilities as it effectively introduces a tax on excess bank reserves.
- Difficult for ECB to raise deposit rate to zero without raising the refi rate at the same time
Workable compromise for ECB would be a hybrid program with a core component where financial risk is shared across Eurosystem and an optional component relating to national central bank risk.
- Remain skeptical on QE impact because of dissent inside the ECB, potential political backlash, legal uncertainties on government bond buying.

- Expect ECB to announce government bond buying of between EU500b and EU700b over 18 months, analysts incl. Athanasios Vamvakidis, Gilles Moec, write in Jan. 16 client note.
- Program likely to include all investment grade govt bonds, with monthly or quarterly pace for purchases; mutualization likely, ECB would retain considerable discretion on details of purchases.
- Crucial issue is if ECB manages to create “open ended” feel; communication will be key for market reaction.


- Expect ECB to announce expansion of asset-purchase program to include govt bonds this week: technicalities will likely be announced in March, strategists including Nikolaos Sgouropoulos say in client note dated Jan. 18.
- Central bank may signal program will stay open until CPI expectations are firmly re-anchored.
- Any QE without shared risk may be counter-productive, analysts including Giuseppe Maraffino write in separate note.

Deutsche Bank
- ECJ’s opinion on OMT last week makes it easier for ECB to act sooner and reduces risk of too much compromise on program’s design, economist Mark Wall write in client note dated Jan. 16.
- Even if central bank waits until March, Draghi has to send a clear signal on Jan. 22 of imminent QE; if vote on QE is in Jan., full details are only likely in March.
- Expect a broad-based asset purchase program encompassing investment grade corporate bonds as well as sovereign bonds, Wall writes in client note dated Jan. 9.
- No target size to be set for sovereign purchases; expects formal announcement of public QE from ECB on March 5.

Goldman Sachs
- Expect ECB to announce expansion of asset-purchase program on Thursday, with focus on sovereign debt and size of EU500b-EU1t, economist Dirk Schumacher writes in Jan. 13 note.
- Purchases to be mutualized and conducted according to capital key; degree of risk-sharing remains contested among GC members, so other modalities are possible.

JP Morgan
- ECB likely to announce EU500b sovereign-debt purchase plan, spread over coming year and with clear signal that it could be scaled up if needed, economist Greg Fuzesi writes in Jan. 16 note.
- Expect ECB to be pari passu to other bondholders and share credit risk on investment-grade bonds across national central banks; sub-IG risk to remain with national central banks.
- TLTROs to be made more attractive; ECB also likely to start buying non-financial corporate bonds.

- ECB is likely to announce a broadening of asset purchase program to include corporate and government bonds, economist Janet Henry says in Jan. 16 note.
- ECB may not announce magnitude of purchases; may stick with previous statement that it intends to expand balance sheet back to early-2012 levels.
- If size of eventual purchases is capped or degree of risk-sharing by national central banks is very limited, announcement could disappoint market expectations.

Credit Suisse
- Attach 70% probability to QE in form of sovereign bond purchases this wk, economists including Christel Aranda-Hassel says in client note dated Jan. 16.
- Expect ECB’s QE announcement to be accompanied by broad guidelines rather than all details; bond-buying should start before mid-Feb.
Base-case scenario, to which CS attaches odds of 50%: ECB announces EU500b-EU750b of sovereign, investment-grade bond purchases.
- Expect ECB to unveil “hybrid” bond-buying program in which some risks are taken by national central banks, strategists incl. Helen Haworth, write in Jan. 15 note.

- Expect ECB to announce QE this week; decision will probably be taken with comfortable majority, economist Guillaume Menuet says in client note dated Jan. 15.
- To maximize effectiveness, QE would need to be open-ended, fully mutualized, encompass all sovereign debt issuers irrespective of credit ratings and include instruments such as supranational issuers and inflation-linked bonds.
- ECB will probably be conservative because of the likely reluctance to pre-commit.
- Suspect inflation generated by QE may be limited, probably leading to another program like QE2 or QE3, possibly by mid-2016.

- ECB is likely to announce this week purchases of EU1t including sovereign debt, possibly augmented by corporate and supranational debt, economists including Reinhard Cluse write in Jan. 19 note.
- ECB will leave door open to do more should inflation fail to move back toward target within acceptable period of time.
- Unlikely for program to include Greek debt just 3 days before Greek election (on Jan. 25)
EUR may fall toward 1.10 USD if ECB QE exceeds expectations.

BNP Paribas
- ECB likely to announce sovereign QE on Thursday, economists inc. Ken Wattret write in Jan. 13 note
Expect deposit rate to remain at -20bps.
- Size of sovereign bond program will probably be ~EU600b per annum, with assets of longer maturity than under OMT and purchases unsterilized.
- Look for conditions to be attached, ruling out participation of Greece.

- ECB is likely to announce EU650b of govt bond purchases; EU650b is a conservative assumption; size could easily be EU1t for sovereigns, head of European rates strategy Andrew Roberts says in client note dated Jan. 19.
- Expect ECB to announce QE this week; program to include corporate bonds and securities issued by EIB as well as sovereign bonds, economist Richard Barwell says in Jan. 19 note.
- Expects no change in ECB interest rates in Jan. meeting.

Societe Generale
- Expects ECB to announce a new purchase program including corporates bonds, EU agencies and government bonds this week, economist Michel Martinez says in client note dated Jan. 16.
- Package will eventually include EU400b of private assets and EU500b-EU600b of sovereign bonds.
- A hybrid system could be contemplated, including part-mutualization based on capital key but with most purchases undertaken by NCBs at their own risk.
- Legal and political hurdles to risk-sharing will remain significant in coming months.

- ECB will probably announce on Thursday a large-scale asset purchase program, including govt bonds, economist Nick Matthews writes in Jan. 19 note.
- Expects ECB to broaden existing ABS and covered bond asset purchases to include corporate bonds, supras and agencies.
- ECB will probably detail monthly flow of public and private sector asset purchases of at least EU40b per month, for as long as necessary, conditional upon inflation outlook.

Credit Agricole
- Easiest way to surprise markets would be with a flexible program of at least EU500b, with more to come if needed, economist Frederik Ducrozet writes in client note dated Jan. 19.
- Expects ECB to commit to monthly pace of EU40b-EU50b of sovereign-bond purchases over 12 to 18 months, or an implied total amount of EU500b-EU700b.
- Sees combination of capital keys and caps on individual bond holdings, with an attempt to keep credit risk at national level.
- EU1t balance-sheet-expansion strategy could be boosted later this year should CPI outlook fail to improve.

ABN Amro
- Draghi will probably announce that ECB will embark on large-scale asset purchase program, mainly consisting of sovereign bonds, head of macro research Nick Kounis writes in Jan. 16 note.
- Program could also include other securities such as non-financial corporate bonds and agency debt.
- Purchases likely to be allocated according to capital key.

- ECB likely to announce broad-based sovereign QE on Thursday, economist Michael Schubert writes in Jan. 16 note.
- National central banks will likely have to buy up own countries’ bonds at own risk; this should ensure that new Greek govt would be cautious about advocating debt forgiveness, and could also result in greater support across Governing Council.
- Purchases likely to be in line with capital key; ECB likely to buy floaters and linkers to avoid market distortions; purchases probably won’t be limited to particular maturities.

- European Court of Justice aide’s opinion on legality of OMT program removed last roadblock to QE, economists inc. James Knightley write in Jan. 16 note.
- Central bank probably won’t present all details of likely program, postponing them to March meeting.

- ECB probably has QE package in pipeline that includes at least EU500b of govt bonds and up to EU250b of non-financial corporate and agency/supranational debt, economist Marco Valli writes in Jan. 15 note.
- Timing a close call; plan could be ready on Thursday, as suggested by recent comments from officials.
- There will be probably be some limit to risk-sharing, with national central banks retaining some or all risk.

Market Securities
- ECB likely to announce corporate and sovereign bond purchases on Thursday, economist Christophe Barraud writes in Jan. 19 note.
- Looks for hybrid approach involving risk-sharing across euro-area, limited to a maximum of 50% of total program, and separate purchases by national central banks.
- ECB may not detail specific amount, could give a range; likely to reiterate commitment to expand balance sheet by almost EU1t.