Welcome to our rolling coverage of today’s ECB Rate Decision(1245 GMT). Previews, live coverage and reaction below…
15.00 (GMT) Review Of The ECB Meeting
With the disappointment of December fresh in the minds of many traders it was clear that Mario Draghi was going to have to deliver the goods at today’s meeting to avoid a repeat of the violent reaction we saw last time around, and he did exactly that.
Expectations were aligned around a 10bps cut to the deposit rate and some technical adjustments to the Bank’s QE program. New measures announced included a 10bps cut in the deposit rate, a 5bps cut in the refinancing rate and a 5bps cut in the margincal lending facility rate alongside adjustments to QE which include increasing the size of pucthases to 80 billion Euros per month, an increase of over 30%, as well as increasing the range of assets available to pucrhase. Assets available for purchase as part of QE will now include non-bank corporate bonds.
Also announced was a series of four Targeted Long-Term Refinancing Operations to be launched in June, each with a maturity of four years. The TLTRO’s are an especially interesting step and highlight the determination of the ECB. The payments will effectively act as a subsidy for Banks taking up the money , balancing out negative deposit rates. For those banks whose net lending surapsses a benchmark, the rate of the TLTRO could be as low as the deposit rate.
These measures successfully delivered the positive surprise that was lacking in December, with EUR sharply sold across the board in the wake of the announcment. Notably EURNZD totally reversed the near 400 pip move seen last night when the RBNZ unexpectedly cut rates. However, as the Press conference following the decision wore on, initial selling was reversed with EURUSD ripped higher from the low 1.08s where Citi E trading reported a huge 500mil Euros in demand. This unexpected strength in EUR will be a major disappointment to the ECB and certainly won’t do their inflation mandate any favours.
It seems that markets remain sceptical about the likley effectiveness of the new measures with perhaps some concern for the European banking sector as rates push deeper into negative territory despite the announcement of a second TLTRO program. The reaction to today’s ECB meeting was vry similar to the reaction seen when the BOJ announced negative rates and suggests that conventional monetary policy easing might no longer be effective.
12.10 (GMT) Bank Views Ahead Of The Meeting
11.55 (GMT) ECB Trade Ideas
11.50 (GMT) ECB Trade Ideas
If the ECB are successful in delivering EUR lower with the policy adjustments announced on Thursday we are likley to see a sharp move to the downside. Looking at EURGBP breakout traders could enter shorts on a break below the immediate .77 area support that has underpinned price over the last month.
I would be interested in fading a downside move if we got as far as the 1.7480 area breakout zone. Brexit concerns still hang heavy over the UK economy and are likely to weigh further on GBP as we head into the June referendum date which could bring EURGBP back up to around .77
11.40 (GMT) ECB Expectations Chart
Institutional ECB expectations chart courtesy of the @bondvigilantes
11.20 (GMT) Bank Views Ahead Of The Meeting
Morgan Stanley – ” Market expectations for the ECB are more moderate compared to December. Today markets are better positioned for a positive suprise (rates markets are priced for 12bps of cuts). A break of EURUSD from 1.0940 suggests a test of 1.0820 ahead of 1.07. We keep our 1.1070 stop for shorts”
BNP Paribas – “We expect significant new easing measures from the ECB today, including a 20bp cut in the deposit rate, a €10bn increase in the run rate of asset purchases, and a six-month extension to the asset purchase program. It is difficult to measure expectations heading into the meeting. However, many market participants appear to be of the view that the central bank will endeavour to “over-deliver”, effectively making it very difficult for the ECB to surprise meaningfully. A result in line with our estimates could see the EUR trade erratically, but we do not expect a break lower and would look for a bounce as markets digest the news. With rate differentials unlikely to widen meaningfully further and the risk environment likely to remain challenging, we expect EURUSD to ratchet higher in the weeks ahead and continue to target 1.16 by mid-year. We maintain long EURCAD and (via options) long EURJPY exposure heading into the decision.”
11.00 (GMT) Headlines Ahead Of The Meeting
The Financial Times write that “Senior European Bankers Voice Concerns Over ECB Cut”
Reuters write that “The latest Reuters poll shows bets are on at least another 10 basis points being sliced off its already negative -0.3 percent deposit rate and the bank adding another 10 billion euros a month to its 1.5 trillion euro bond-buying program.” Full article here
10.40 (GMT) Expectations For This Meeting
As was the case in the run up to the December meeting, with the ECB having clearly signalled further easing and data continuing to support the case for such action, market consensus is calling for further action on Thursday.
Market Base Case Scenario
- In terms of forecasting what policy adjustments the ECB is likely, consensus is built around a 10bps+ rate cut and technical adjustments to the QE program. Beyond this base case , expectations vary and the different outcomes become increasingly technical.
With Inflation running so low and inflation expectations hitting new lows, it is clear that the ECB will need to take decisive action and traders are expecting that the ECB will not repeat the mistake it made in December where it essentially over-promised and under-delivered. Notably, ECB members have been far less vocal about forthcoming stimulus this time as they try to keep expectations contained. Indeed reports emerged last week from ECB sources stating that was no consensus on action beyond a 10bps deposit rate cut, which some players suggest is the ECB attempting to bluff markets into lowering expectations so as to achieve greater impact when measures are announced and avoid the consequences seen in December.
Some analysts are forecasting a similar disappointment to that which we saw in December whereby the ECB do too little and markets react adversely. The base of this view is built around two themes
- Oil has recovered more than 40% off 2016 lows and looks set for further recovery which will feed back into higher inflation
- Going further into negtiave rates could be detrimental to the already shaken European Banking sector, a concern noted by ECB’s Couere last week
However, given yet another negative inflation print in the latest reading, a year after the ECB announced its huge QE program, it feels as though the greater risk is that the ECB will take more aggressive measures than markets expect, fuelling EUR downside. Whether this be a greater than anticipated rate cut, expansion of QE, tiered interest rates or other measures, it seems unlikely that the ECB would allow room for market disappointment given the reaction in December. Key to delivering an effective outcome on Thursday will be not only the announcement of immediate measures but also the scope left for further easing in the coming months. To avoid the wrath of expectant markets, Draghi is going to need to convince markets with affirmitive action and a clear signal that more can be done.
This meeting will also include an update of the ECB staff macroeconomic forecasts which will now for the first time reflect the outlook for 2018. These updates will also be key a driver of market reaction.
10.20 (GMT) Data & Developments Since January
Data and developments since the January meeting have done little to suggest that the ECB would refrain from further easing and indeed market expectancy is heavily built on the side of further easing, the only questions remains to what extent will the ECB provide further stimulus.
January CPI came in at -0.2% vs expectations of 0% , marking the lowest print since March 2015, whilst Core CPI also fell short of expectations at 0.7% vs 0.9% expected. This disappointing inflation reading underscores the necessity of further easing as the European Central Bank fight to keep the EuroZone out of deflation.
The downside risks from the slow-down in emerging markets that the ECB cited in January are alive and well. Concerns for the slow-down in China have continued to remain prominent with the latest Chinese Manufacturing data marking the seventh consecutive monthly decline and the PBOC acting to reduce domestic RRR levels yet again alongside cutting its 2016 growth forecast.
One positive development has been in energy prices. Oil, which plumbed fresh multi-year lows in February, has since managed to recover and stabilise above $30 per barrel as optimism grows for a production freeze among major producers, fuelling a covering of short positions.
Since the January meeting EUR has fallen sharply lower against all major counterparts with the exception of USD and GBP which are hampered by diminished rate-hike expectations and Brexit concerns respectively.
10.10 (GMT) Notes From January Meeting
The ECB’s January monetary policy meeting saw rates remain unchanged, as expected, though the press conference following the decision saw ECB president Mario Draghi delivering a message that was more Dovish than many expected.
Draghi noted that inflation was still well below the ECB’s target and that the expected 2016 inflation path is now significantly lower than projected in December due to continued declines in Oil prices. Downside risks to both inflation and growth were cited, with the slowdown in emerging markets listed as prominent among the contributing factors.
Draghi confirmed that the ECB will review its policy stance at their March meeting, stating that the Bank’s credibility would be harmed otherwise, and reiterated also the ECB’s willingness to act, saying that there were “no limits” to how far they are willing to go in employing their resources to achieve their mandate.
10.00 (GMT) Welcome to our coverage of the ECB March meeting
Hello and welcome to our live coverage of today’s ECB Meeting. Here are the key details for the day:
- Thursday March 10th 1245GMT
- Current rate 0.05%, expected unchanged
- Current Deposit Rate -0.30% expected -0.40%
- Press conference to follow