ECB review: Package deal coming in December

• Today, the ECB pre-announced that a recalibration of the current policies will come in December, although it did not provide many clues of what the package will entail. The decision to 'task committees' and recalibrate was in full agreement in the GC. 
• All policy options are in play. With the ECB seemingly more concerned about the economic outlook losing momentum than the inflation outlook, we expect it to tweak the TLTRO parameters, scale up its bond purchases and increase the tiering multiplier and refrain from cutting the deposit rate, although we cannot rule it out.
• The problem at hand (lockdown) is tricky for the ECB to address, but Lagarde confirmed that the ECB 'were there at the first wave, we will be there at the second wave' and compared to previous defensive strategies (except PEPP), the ECB seems more aggressive. 
• Front-end repriced lower in rates markets, amid EURUSD headed slightly lower during the press conference. We expect EURUSD to pick up ahead of the US election. 

Losing momentum - and with downside risks

President Lagarde stressed that the euro area economy is losing momentum faster than expected and that recent hard data, survey results, and high frequency indicators point to a significant softening of economic activity in Q4. Asked whether the ECB's estimate for Q4 GDP growth (3.1% q/q) is too optimistic, Lagarde acknowledged downside risks, given the containment measures over the course of November.

Coupled with growth risks that are seen now clearly tilted to the downside and continued muted underlying price pressures, the ECB's economic narrative seems to set the scene for a comprehensive easing package in December. Whether this will do the trick to brighten the economic prospects remains an entirely different question though. In that respect, fiscal support remains the more effective 'weapon of choice'. Lagarde urged policymakers to get the EU recovery fund up and running as soon as possible, as discussion between the European Parliament and EU Council remain deadlocked, holding up the ratification process. We agree with Lagarde on the importance of the fund to cushion the economic blow, but this sense of urgency does not yet seem to have gripped EU leaders.

The problem at hand...

The economic outlook is near term weakening as the lockdown leads to restricted consumption in the euro area. Therefore, the ECB decision to pre-announce a policy package in December shows that it believes it is important to 'buy time' until the economic recovery is on a solid trajectory and / or a vaccine is developed and hence consumption can reach more normal levels. 

Hence, the problem at hand, which the ECB can address, is focused on credit being plentiful and financial conditions being easy. The solution (unless the ECB wants to make outright transfers) is in the hands of national governments / at an EU level.