12.20 (GMT) Institutional Views Ahead Of The Meeting
HSBC: ECB to wait until Dec to extend QE by 6-months at E80bln per month, rise limit
in non-CACs and purchase bonds above 30-years.
UBS: Base case for ECB to extend QE at E80bl per month for 6-months, most likely
change to QE will be rise in limit on non-CACs and scrapping of deposit floor.
Goldman: No change in Oct with Draghi giving little away. see 6-month extension
of QE at E80bkn per month, removal of deposit floor & rise issuance limit to 50% in Dec.
Citi: See no change in Oct but for ECB to re-calibrate size of QE to
E60bln per month and extend it by 6-months at December meeting.
BNP: See no change in Oct, but 6-month QE extension announced in Dec.
11.50 (GMT) Possible Scenarios Ahead Of The Meeting
In terms of gauging possible market reaction to tomorrow’s meeting let’s consider some different scenarios that we might see play out which at the moment can broadly be seen as
- No further information
- QE extension – departure from capital key
- QE extension – removal of deposit rate floor
- QE extension – raising ISIN/issuer limit
- Tapering/ increased expectations of tapering
11.30 (GMT) Expectations Ahead Of The Meeting
Looking at positioning heading into the meeting we can see that institutional players have once again been building short positions. You can see that after starting to rebound higher here post Brexit, institutions have now started to load up to the short side again.
So clearly expectations are starting to align around an extension of QE, so what is driving this argument and fueling these expectations?
1- Inflation remains problematic
Despite better headline inflation readings, core inflationary pressures in the eurozone remain weak. Stripping out the more volatile component core inflation has actually been on a downward trend this year moving from 1% in January to 0.8% in August. There is little sign currently of any improvement ahead and is likely to remain at subdued levels. Furthermore, below trend growth supports a widening of the output gap and weak wage pressure and subdues input prices point to further benign cost pressure.
2 – Risks of second round effects
Although energy price effects and the prospect of higher headline inflation may slightly reduce the risks of negative second round effects, market based measures of inflation expectations remain extremely depressed. With 5Y inflation expectations lingering around 1.4% despite the recovery in Oil prices. There still remains elevated global uncertainty with ongoing CNY depreciation and thus there is still a case for the ECB maintaining monetary stimulus
Again though key to point out that markets are not expecting further rate cut action by the ECB and ECB’s Mersch commented recently that “Cutting interest rates even more would come with increasing risks as reactions to such cuts might not always be linear. This needs to be taken into account when doing a cost-benefit analysis.” “…interest rates can only stay very low over the short term. The longer they remain low, the more pronounced the negative side effects will become”.
11.10 (GMT) Recent Conditions
Over the last few weeks we’ve seen am increase in volatility and momentum in the Euro which has been distinctly lacking over recent months. This volatility has been driven by two factors; firstly the possibility of tapering and then secondly the prospect of an extension of QE.
Reports that the ECB were considering tapering their QE program which is due to end in March next year, saw the EUR spike higher initially alongside a spike in 10y yields on German, French Italian and Spanish paper. However, these reports were soon after dismissed by ECB members. Indeed, following the dismissal of those reports analysts are now changing their view and expect the ECB to announce an extension of their QE program beyond the march 2017 end date, hence the sharp leg down which we’ve seen in EURUSD over recent days.
expectations ahead of the meeting have now taken a distinctly Dovish twist. Whilst markets are not expecting the bank to ease further at this meeting they are expecting that the ECB will announce an extension of QE or atleast give a signal that an extension of QE is likely to come.
The bank’s recent reluctance to ease further despite built up expectations are consistent with Draghi’s previous comments about the diminishing returns of further easing and especially moving deeper into negative rates however, with EuroZone growth remaining sluggish there is still a case for further ECB action.
11.00 (GMT) Welcome to our day’s rolling coverage
Hello and welcome to our live coverage of today’s ECB Meeting, with Littlefish FX Analyst James Harte. Here are the key details for the day:
- European Central Bank Rate Decision September
- Thursday October 20th, 12.45GMT1
- Current rate 0%, expected unchanged