QE Coming To An End –Not Officially Announced Yet
Overall/forward guidance. At the governing council (GC) meeting next week, we do not expect explicit new forward guidance, but may see some hawkish bits, in particular in wage growth discussions along the lines of ECB’s chief economist Peter Praet’s comments on Wednesday, which were surprisingly hawkish.
Tasked committees. Draghi will face numerous questions on an (upcoming) change in forward guidance. Just as Draghi referred to tasked committees when lowering the APP purchase rate from EUR80bn to EUR60bn and EUR60bn to EUR30bn, we could envisage him using a similar reference while waiting for the July meeting .
Timing . While we expect forward guidance to be changed in July , we cannot rule out the possibility of it coming already next week given the recent comments from Praet. In our view, we have not received any data that should warrant the ECB moving already now. The ECB’s actions, which were confirmed in March, have been reactive when removing stimuli and not proactive . In our view, a change to the forward guidance next week would also question the mantra of ECB being reactive . Should APP guidance change next week, we expect the ECB to step up its rhetoric on rates, reinforcing the depo rate guidance.
New staff projections. We expect growth to be revised down by 0.2pp and inflation to be revised up by 0.2pp in 2018 . We do not look for big changes in the core inflation forecast.
Italy. Focus on Italy during the Q&A. We do not expect the ECB’s QE tapering discussions to be changed due to the Italian turmoil. Should the turmoil lead to a sustained deterioration in confidence (in turn leading to a slowdown in the fragile Italian economy) we expect the ECB to get more worried. Further, we expect Draghi to acknowledge the new government and to say that he expects all EU (EA) countries to live up to the rules and that any ECB response is laid out in the rule book (ESM).
Buzzword bingo. You will find our updated buzzword bingo at the end of this preview.
Fixed income. We expect little impact on the EGB term-premium from the June meeting and the impact on the long end should be small. If – contrary to our expectations – we see a more hawkish signal from the ECB, the 5Y point on the EUR curve could be especially exposed. We continue to be positioned for a tightening of periphery (excluding Italy) spreads versus Germany/swaps.
FX . EUR/USD in lower range for longer. Hawkish hints at the press conference should still keep up the sense of the ECB slowly but surely continuing policy ‘normalisation’ . While the USD is set to stay supported from a rates point of view, the ECB keeping up its exit process should ensure that EUR/USD is kept afloat further out. We look for broadly the 1.15-1.21 range to be sustained on a 6M horizon.
