As expected, the ECB did not offer new easing measures or monetary policy signals at its meeting today. The central bank did not sound too concerned about the recent escalation of geopolitical risks. The ABS purchases are coming, but not any time soon. The ECB’s message left core bond yields free to continue falling in the near term, while the euro can weaken further.
The ECB’s basic message was largely unchanged. The opening paragraph added a reference to the differences in terms of the monetary policy cycle between major advanced economies, while the ECB talked of heightened geopolitical risks, whereas it previously only talked about geopolitical risks. He said it was too early for more detailed estimates on how the Russian sanctions would affect the Euro-area economy.
ECB surprisingly confident and relies on the TLTROs
Risks to the economic outlook remain on the downside, while the Governing Council sees both the downside and upside risks to the outlook for price developments as limited and broadly balanced.
On the positive side, Draghi noted that the recent data suggest that the loan stock to non-financial companies would be stabilizing, while the recent lending survey had been rather encouraging. Somewhat surprisingly, Draghi did not give much attention to the recent weakening of the euro. He only mentioned late in the Q&A that the fundamentals for weaker exchange rate were better now than 2-3 months ago.
Recent developments have thus not affected the ECB’s assessment to a large extent, and the central bank remains maybe even surprisingly confident amidst recent headwinds. The targeted longer-term refinancing operations (TLTROs) are in the pipeline, and the ECB expects these operations to provide further easing. We largely agree that the LTROs will be helpful, but risks clearly remain to the downside for now and weak data in the near future will likely increase market speculation of even more ECB easing ahead.
ABS purchases coming – broad-based asset purchases not on the agenda
The ECB noted it had intensified preparatory work related to outright purchases in the asset-backed securities market. The ECB is in the process of hiring a consultant to help with the programme, and the work was proceeding regardless of the timing of possible regulatory changes. Draghi said he expected the programme to surface in any case, even though no final decisions had been taken.
We continue to expect to see ABS purchases ahead, but the programme is far from ready, and will see daylight very late this year, at the earliest.
As Draghi’s message was in general rather uneventful, one of the highlights was his characterization that the ABS purchase programme would not target sausages full of derivatives, suggesting the programme would focus on ABSs having real loans as underlying assets.
Draghi refused to elaborate on the prospects of a broad-based asset purchases programme. Clearly, the ECB remains happy with the measures taken so far, and is not about to introduce further easing.
The TLTROs are coming, and Draghi mentioned market estimates of demand totaling EUR 450 to 850bn.
New lows still ahead for German bonds – EUR to remain under pressure
Amidst further geopolitical tensions, increasing growth doubts and wobbly risk appetite, the ECB’s message should do nothing to change the recent course of markets: core bond yields will continue to feel downside pressure, euro will weaken further in the near term, and risk appetite will show signs of fragility. The German 10-year yield remains on its way towards 1%, and even sub-1% readings look increasingly likely in the coming weeks.
Nordea