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15 May 2014
Analyst Roundup: Will the poor GDP data encourage Draghi to act?
FXStreet (London) - Data released today indicated that Eurozone GDP expanded by only 0.2 percent in the first quarter of 2014, missing the consensus expectation of a still-weak 0.4 percent rise. Year-on-year growth came to 0.9 percent. German remained the biggest growth driver in the currency union, gaining 0.8 percent while France and Italy disappointed. But while the GDP print represents further reinforcement of the Eurozone’s dismal outlook, will it be enough to prompt ECB president Mario Draghi into action?
ING Bank, Peter Vanden Houte, Chief Eurozone Economist
If anything, today’s dismal figure should increase the pressure on the ECB to act next month. To keep growth on track and fight deflationary pressures, a renewed euro appreciation has to be avoided at all cost. Therefore we believe the ECB will follow up its recent dovish rhetoric at next month’s policy meeting. We now expect a 10bp cut in both the refi rate and the deposit rate and an extension of the full allotment scheme beyond July 2015. Some liquidity measures like a limited funding for lending scheme, also seem to be under consideration, but the likelihood to see fully–fledged QE remains close to zero for the time being.
Brown Brothers Harriman - Marc Chandler, Global Head of Currency Strategy
ECB President Draghi had indicated as his press conference that there was unanimous support for unconventional action if needed in June. This, as well as other signs, suggested that the Bundesbank’s objections had softened. There are two important elements of the ECB’s potential action that is important in this context: when and what. Draghi underscored a move in June, and this has really been the case since April’s ECB meeting. The “when” is the easy part. The “what” remains more difficult. If there has been needed information, it is that the asset purchase scheme is somewhat less likely, and rate cuts are more likely.
However, even here, it is not clear that this means a negative deposit rate.
There is scope, as we have argued, for a lending rate cut, which is the top of the ECB’s rate corridor. The repo rate can be cut further. Required reserves can be cut. SMP sterilization attempts could be suspended. A negative deposit rate could have potentially disruptive consequences for the very banks that the ECB is seeking to help and will soon have supervisory responsibilities. Moreover, the knock-on effects to the government and business will be detrimental as banks will likely pass the negative rates. The local and federal governments deposit (taxpayer funds and borrowings) at banks from which they draw. Imagine a department that has tightened its belt under austerity and is allocated its annual budget, which then gets hit with the negative deposit rate. It is like an additional tax.
St. James’s Place Wealth Management
Last week the European Central Bank (ECB) president Mario Draghi held the benchmark interest rate at 0.25%, despite concerns that it should act to counter persistently low inflation. But Draghi hinted that the ECB could ease monetary policy. Acknowledging the market dissatisfaction with the low level of inflation, Draghi said the central bank was “comfortable” about action next month. The hint triggered a slide in the euro against the dollar, ending the week down 0.8% to $1.38. Peripheral eurozone government debt yields were pushed to fresh lows as prices rose. Analysts believe that a move by the ECB to cut the cost of money in the region further next month would make eurozone assets look even more attractive.
RBS – Paul Robson, FX strategy
The ECB has (almost!) pre-committed to some form of monetary easing manoeuvre at its next policy meeting in June. We do not rule out asset purchases near term but most likely to move the entire corridor of rates down by 15bp, meaning negative depo rates. EUR impact? Meaningful new information from Mr Draghi removes the immediate 'pop to early 1.40s' risks. However, the ECB hasn't got much bang for its (quasi) pre-commitment buck either in terms of lower EUR. So any EUR/USD weakness will hence most likely have to come via the USD leg.
Deutsche Bank, Jim Reid, Credit Strategist
The global bond market was in the midst of a major rally yesterday as expectations of ECB action increased.
Despite all the talk about a potential rate cut at the June ECB meeting, the EUR was remarkably resilient against the USD yesterday, managing to close a little firmer at 1.372. Though we should point out that this came after 5 days of declines stemming from last week’s ECB meeting, so perhaps a day of consolidation was overdue. The EUR may have also been supported by comments from Weidmann suggesting that asset purchases are not the policy tool of choice for the time being. Weidmann also clarified that the Bundesbank had not agreed to any policy action as of yet, despite the flurry of articles in recent days suggesting that the Bundesbank was indeed on board with a rate cut and potential ABS purchases to fight low inflation.
ING Bank, Peter Vanden Houte, Chief Eurozone Economist
If anything, today’s dismal figure should increase the pressure on the ECB to act next month. To keep growth on track and fight deflationary pressures, a renewed euro appreciation has to be avoided at all cost. Therefore we believe the ECB will follow up its recent dovish rhetoric at next month’s policy meeting. We now expect a 10bp cut in both the refi rate and the deposit rate and an extension of the full allotment scheme beyond July 2015. Some liquidity measures like a limited funding for lending scheme, also seem to be under consideration, but the likelihood to see fully–fledged QE remains close to zero for the time being.
Brown Brothers Harriman - Marc Chandler, Global Head of Currency Strategy
ECB President Draghi had indicated as his press conference that there was unanimous support for unconventional action if needed in June. This, as well as other signs, suggested that the Bundesbank’s objections had softened. There are two important elements of the ECB’s potential action that is important in this context: when and what. Draghi underscored a move in June, and this has really been the case since April’s ECB meeting. The “when” is the easy part. The “what” remains more difficult. If there has been needed information, it is that the asset purchase scheme is somewhat less likely, and rate cuts are more likely.
However, even here, it is not clear that this means a negative deposit rate.
There is scope, as we have argued, for a lending rate cut, which is the top of the ECB’s rate corridor. The repo rate can be cut further. Required reserves can be cut. SMP sterilization attempts could be suspended. A negative deposit rate could have potentially disruptive consequences for the very banks that the ECB is seeking to help and will soon have supervisory responsibilities. Moreover, the knock-on effects to the government and business will be detrimental as banks will likely pass the negative rates. The local and federal governments deposit (taxpayer funds and borrowings) at banks from which they draw. Imagine a department that has tightened its belt under austerity and is allocated its annual budget, which then gets hit with the negative deposit rate. It is like an additional tax.
St. James’s Place Wealth Management
Last week the European Central Bank (ECB) president Mario Draghi held the benchmark interest rate at 0.25%, despite concerns that it should act to counter persistently low inflation. But Draghi hinted that the ECB could ease monetary policy. Acknowledging the market dissatisfaction with the low level of inflation, Draghi said the central bank was “comfortable” about action next month. The hint triggered a slide in the euro against the dollar, ending the week down 0.8% to $1.38. Peripheral eurozone government debt yields were pushed to fresh lows as prices rose. Analysts believe that a move by the ECB to cut the cost of money in the region further next month would make eurozone assets look even more attractive.
RBS – Paul Robson, FX strategy
The ECB has (almost!) pre-committed to some form of monetary easing manoeuvre at its next policy meeting in June. We do not rule out asset purchases near term but most likely to move the entire corridor of rates down by 15bp, meaning negative depo rates. EUR impact? Meaningful new information from Mr Draghi removes the immediate 'pop to early 1.40s' risks. However, the ECB hasn't got much bang for its (quasi) pre-commitment buck either in terms of lower EUR. So any EUR/USD weakness will hence most likely have to come via the USD leg.
Deutsche Bank, Jim Reid, Credit Strategist
The global bond market was in the midst of a major rally yesterday as expectations of ECB action increased.
Despite all the talk about a potential rate cut at the June ECB meeting, the EUR was remarkably resilient against the USD yesterday, managing to close a little firmer at 1.372. Though we should point out that this came after 5 days of declines stemming from last week’s ECB meeting, so perhaps a day of consolidation was overdue. The EUR may have also been supported by comments from Weidmann suggesting that asset purchases are not the policy tool of choice for the time being. Weidmann also clarified that the Bundesbank had not agreed to any policy action as of yet, despite the flurry of articles in recent days suggesting that the Bundesbank was indeed on board with a rate cut and potential ABS purchases to fight low inflation.