Tomorrow's ECB meeting "looks set to be sleepy" according to Saxo Bank's Mads Koefed as Draghi is largely cornered into confirmation he will do "whatever it takes" and some additional details on the corporate bond purchase plan. Most of the sell-side's research suggests the same, as Bloomberg notes, ECB will probably leave the door open for further cuts if needed; but any downside risk for the euro is seen limited, as Draghi stays on hold by reinforcing its dovish stance after the mix of easing measures announced in March with some defense of the efficiency of his policies after recent criticism by Germany.
The bund market appears to once again pricing in some further deposite rate cuts (deeper into negative territory), but has been disappointed twice now...
And as Saxo's Mads Koefed notes, unlike the explosion of announcements that was the March ECB meeting, today's meeting of the governing council promises to be dull.
Inflation has ticked up to 0% year-over-year in March from minus 0.2% when looking at the headline series while core inflation climbed back to 1% last month from a one-month visit to 0.8% in February.
Economic activity has remained subdued since the last ECB meeting though the flash manufacturing PMI has climbed to 51.6 from 51.2. The services PMI index declined to 53.1 from 53.3 and overall data – for example, the EuroCOIN series – suggest GDP growth of around 0.3% q/q for Q1.
This comes on the back of a similar print of 0.3% in both Q3 and Q4 of last year.
Lending to households accelerated to 2.2% y/y in February from 1.9% in January with consumer credit climbing at a 5.2% annual rate, the highest level seen since early 2008. Lending to corporations, meanwhile, is evolving more tepidly with growth of just 0.6%.
The M3 measure of the money supply climbed 5% y/y through February, unchanged compared to January.
Turning to the markets, EURUSD has strengthened by 1.5% since the March 10 meeting to around 1.1340 following a 1.6% move higher on the day. More generally, however, the euro has traded sideways against a basket of currencies (EURJPY, for example, is down 1.9%), but this excludes the 1.2% move during March 10.
Stocks (STOXX50) are 4.8% higher while EURIBOR has fallen.
Taking it all into account, the meeting of the governing council looks to be a sleepy affair with not much new coming to the surface. We may get some additional details on the corporate sector purchase programme (part of the €80bn monthly purchases), but otherwise the stage is set for Draghi to reiterate that the ECB stands ready to combat low inflation while expressing confidence in the measures announced last month.
The ECB meeting always has the potential to be a market-mover, but this particular one looks destined to be a non-event.
Will Draghi surprise? Again? Most of the sell-side thinks not...
Goldman Sachs (Dirk Schumacher)
- ECB to keep rates unchanged, Draghi will express confidence that package unveiled in March will help steer CPI toward target
- Draghi also likely to express ECB’s willingness to respond if downside risks to growth and CPI materialize
- Draghi will also clarify that further rate cuts remain part of monetary toolbox after his comments in March were interpreted by many as closing the door for further rate cuts
- Some further details on new CSPP may be published
- Expects CSPP to be conducted in similar fashion to covered bond and asset-backed securities program, and purchases to take place in primary and secondary market; ECB will decide in discretionary way how much corporate debt to buy
- Expects an extension of APP to Sept. 2017 from March 2017 currently
JPMorgan (Greg Fuzesi)
- No action expected this week; see next round of easing to focus on extending QE program beyond March 2017
- Chances of further rate cuts may be higher than initially thought
- ECB concerned about pressure of negative rates on banks and about fueling currency war; that said, incremental deposit-rate cuts still seem possible, as does a tiered reserve charging system; Draghi is likely to clarify the message around this at this week’s press conference
BofAML (Gilles Moec, Athanasios Vamvakidis)
- Expect Draghi to defend ECB this week; he could also remind markets that QE is open-ended and won’t stop as long as ECB is missing CPI target
- Draghi also likely to clarify that another depo-rate cut remains available
- Expect Draghi to sound dovish but do not see a sustained market impact
- More sustained EUR weakness requires a critical mass of strong U.S. data and stable global markets allowing Fed to sound more confident
- Continue to forecast EUR/USD at parity by end-2016, expecting two Fed hikes this year
BNP Paribas (Ken Wattret)
- ECB should reiterate this week that it stands ready to take action to deliver on price-stability mandate
- While expect the door to be left more open to further cut in policy rates than during Q&A session on March, there is limited room for maneuver
- CSPP details possible but may take longer
- Expect ECB to follow the template used for current asset-backed security and covered-bond purchase programs, suggesting no specific numeric target for monthly volume of purchases, buying in both primary and secondary markets, and opting for risk sharing
Citigroup (Guillaume Menuet)
- Don’t expect any new measure this week
- Look for more policy measures in coming months including a refi rate cut by 5bp each in Sept., Dec. and March 2017
- Also expect a QE extension by another 6 months in Sept., adjustment to issue/issuer limit for PSPP to ~40% and 10bp depo-rate cut in March next year
HSBC (Karen Ward)
- Draghi to convey the message that ECB can still do more
- During Q&A, expect questions related to progress with Greece and IMF and on what might happen to Portugal’s access to QE if DBRS downgrades the country on April 29
- Expects Draghi’s answers to be elusive
UBS (Reinhard Cluse)
- Expects a debate on limits of monetary policy, ‘helicopter money’, corporate bond purchases and credit conditions at this week meeting
- Base-case scenario remains that ECB is “done” now and that it won’t add more stimulus over coming months
Morgan Stanley (Elga Bartsch)
- It might be too early yet to get full formal details on planned buying of corporate debt under new CSPP
- Don’t expect any additional policy measures before 3Q
- Expect another depo-rate cut of 10bp in 2H and see a near even chance of ECB upping and extending QE
Natixis (Johannes Gareis)
- Draghi likely to address recent EUR strength by downplaying comments made at March meeting that policy rates may already have reached the lower bound
- More details about future corporate-bond purchases and TLTROs in focus this week
- ECB will take a wait-and-see approach over coming months; from a long-term perspective, CPI might be too weak for ECB to remain on hold; the most likely easing step is an extension of QE program beyond March 2017
UniCredit (Marco Valli)
- ECB’s focus remains on implementing several measures already announced; expect a strong, open-hearted defense of ECB policies
- This week’s meeting is unlikely to generate a meaningful impact on euro
- ECB is very likely to be unhappy with stronger EUR; however, there is not much Draghi can do about it, at least for now
Commerzbank (Bernhard Gruenaeugl)
- Probably too early to add substantial detail on CSPP with still about two months to go before the actual start of the program
- The question of whether insurance corporations’ seniors could be bought or not should remain a matter of lively debate for now
Credit Suisse (Peter Foley)
- ECB is likely to leave the door open to additional policy measures in future if economic situation deteriorates
Nordea (Aureljia Augulyte)
- Keep long EUR/USD
- Market is pricing close to a full 10bps cut in year ahead, so EUR needs a really big surprise to get knocked
ABN Amro (Nick Kounis)
- Focus in April meeting will be on details of corporate- bond scheme; ECB will probably reveal a relatively large eligible universe of ~EU750b
- It would include traditional non-financial corporates as well as “financial corporations other than credit institutions”
- In this category, there are many funding entities of normal corporates, real-estate corporates and insurers
- Expects ECB to also include floating-rate notes, bonds that mature within 1 year and those with an amount outstanding less than EU500m
ING (Petr Krpata)
- Negative impact on EUR should be very limited as any strong pre-commitment to further easing should be absent
- It’s increasingly difficult for ECB to materially weaken EUR
- Despite no real action, there would probably be some dovish comments, whereby ECB stresses downside risks to economic outlook
BBVA (Roberto Cobo Garcia)
- Draghi will likely stress that ECB keeps the door open to adopt further easing measures if needed; he will probably remark that further rate cuts aren’t out of the table
- Expect ECB meeting outcome to be negative for EUR; also expect more details on CSPP
Credit Agricole (Manuel Oliveri, Valentin Marinov)
- ECB may not mention EUR but will keep the door wide open to more accommodation
- While EUR may recover in immediate aftermath, the longer-term risks for currency should be on downside
Finally we note that EURUSD did drop quite notably today...though still remains considerably stronger post-March meeting...
“The euro has looked a bit vulnerable," said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. "There has been some speculative selling ahead of the ECB on the view that Draghi will not do anything tomorrow policy-wise but might sound dovish, and could open the door to lower rates again."