ECB: Patience is a virtue – Nordea Markets

Jan von Gerich, Global Fixed Income Strategist for Nordea, suggests that they expect an unchanged forward guidance from ECB next week as they think in the current environment, the ECB will want to postpone decisions on the future of its asset purchases for as long as possible. The balance of risks in markets is tilted towards a dovish surprise, he further adds.

Key Quotes

“There have been several developments since the March meeting that if anything, should make the ECB more careful about taking the next steps towards an exit from its net asset purchases. Next week’s Governing Council meeting should thus not bring the ECB any closer to signalling the removal of monetary accommodation.”

“Changing the guidance would be another step towards ending net asset purchases and thus also eventually raising rates. The ECB will probably not be ready to take such a step yet. The central bank still wants to emphasise patience, prudence and persistence. This was illustrated again earlier this month, when the ECB felt the need to clarify that the comments by Austria’s Nowotny about ECB’s deposit rate hike did not represent the view of the Governing Council.”

“Forward guidance will thus likely be left unchanged next week, while Draghi’s tone should be relatively dovish.”

“Changed guidance only in the summer

• Going forward, we do not expect the ECB to change its forward guidance until the July meeting, unless the next few inflation numbers significantly surprise to the upside. This is also the meeting, when we expect the ECB to announce another 6-month extension to net asset purchases, but with a lower monthly volume of EUR 15bn.
• Changing the guidance at the same time as announcing an extension would soften the significance of the change, but at the same time pave the way for ending the net purchases in the first half of 2019. The ECB may signal as early as in June, when the new macroeconomic forecasts will be available, that important decisions regarding the future of the asset purchases will be taken at the July meeting.”

“Financial markets implications

• As we anticipated a few months back, the market had gotten a tad ahead of itself in its judgment of the pace of the ECB exit. Accordingly markets have re-priced the scope for a swift rate hike as early as in late 2018 or early 2019. Only a rather minor chance of a rate hike 12 months from now is currently priced in to the EONIA curve.
• EUR/USD has been surprisingly resilient to the recent re-pricing of the ECB outlook. Range-trading has been the name of the game over the past months, despite a firmer Fed outlook and a less firm ECB outlook. The scope for a further defensive repricing of the outlook for the first rate hike seems relatively small by now, but a QE extension could still prove EUR/USD negative at the meeting in July.
• Hence, our base case is a relatively eventless ECB meeting next week, which is why EUR/USD should remain-range bound for now. We do see the balance of risks tilted towards a slight dovish surprise, which could send EUR/USD towards the lower part of the recent interval, while there is also some downside potential left in Bund yields that are back trading in the 2017 interval of 0.2% to 0.6%.
• A potential second-round taper tantrum (after the first round in late 2017 and early 2018) is still two or three quarters away.