ECB to evolve its assessment and extend its removal of downside risks - BBH
|The ECB meeting on July 20 is the most important event this week, but it will not change policy and is unlikely to announce any change in its asset purchases, expects the analysis team at BBH. However, it is likely to continue to evolve its assessment and extend its removal of downside risks by dropping the possibility that it could accelerate its asset purchases if necessary, they further add.
Key Quotes
“This has long stopped being pertinent. Nevertheless, in the name of good housekeeping, and for the sake of preparing the investors for tapering, the wording can be adjusted.”
“We expect that presented with new staff forecasts in September, the ECB will use that meeting to announce that it will continue to expand its balance sheet by buying mostly sovereign bonds next year, but at a reduced pace. We suspect a six-month extension will be sought (instead of nine as the length of the current extension) and a pace of 30-40 bln euros a month. There is some risk that it stops buying ABS securities altogether. It does not appear to have been a particularly successful endeavor.”
“Intentional or not, the ECB has spurred a rise in interest rates. Perhaps it is as if the interest rates have been in a pressure cooker and what the ECB managed to do was to release some pressure. The German 10-year yield has risen for three consecutive weeks. It was at 25.5 bp at the close on June 23. Before the weekend, the yield probed near 62 bp before finishing just below 60 bp. Many models project fair value to be closer to 1.0 % if not a bit above.”
“However, fair value models make assumptions about historic relationships that may no longer exist or have been weakened. While ECB officials do not often directly criticize or correct market judgments, we suspect Draghi will reiterate the assessment made at the last meeting: that inflation is not yet on a self-sustaining and durable path toward its target. The ECB does not want a premature tightening of financial conditions. And, yet given the backing up of interest rates and the strengthening of the euro, financial conditions by some measures are tighter now than at end time since the end of 2014. It should not be too surprising if Draghi leans against it.”
“To be clear, we expect the Fed's balance sheet to shrink by more than $200 bln before the ECB is done with its asset purchases. The Fed may raise rates another two or three times before the ECB can bring its deposit rate out of negative territory.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.