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ECB Preview: Expect More Talk And No Action

Tyler Durden's picture




 

New cycle lows in Eurozone inflation along with disappointing ISMs across various nations raise the probability of a dovish ECB meeting tomorrow, in Citi's view. However, as Deutsche expands upon, they do not see an obvious trigger for "actual" policy easing in the data and events since the last ECB Council meeting and any "action" will take the form of words, not deeds. Despite all the hope in the world, Deutsche warns there would have to be a substantive deterioration relative to current forecasts to elicit an asset purchasing/QE response from the ECB. Instead, more comments on Euro strength, stronger forward guidance, confirmation of the magic of OMT are more likely but so far the market is absolutely calling Draghi's bluff and saying 'put-up-or-shut-up' especialy in terms of EUR strength.

The FT does a great succinct explanation of where we are and what expectations are...

Citi seems a little more hopeful for a dovish ECB meeting and lays out a few reasons why (and what that 'dovishness' might look like)...

The chances of dovish ECB meeting have increased in our view after HICP inflation hit new cyclical lows in March and excess liquidity drain pushed money market rates higher again. The ECB could deliver a dovish statement and comments focusing on euro's recent strength; stronger forward guidance and measures that could fuel expectations of more unconventional policies like a suspension of SMP sterilization and an FLS-program. With markets taking euro shorts off the table, EUR could come off again in the wake of the ECB. EURUSD could correct lower still in the run-up to NFP. Unchanged ECB could lead to further short covering pushing EUR close to recent highs against majors.

 

The short squeeze in EUR could continue for now despite weaker HICP print for March as markets remain wary of potential disappointments ahead of the ECB. This also means, however, that market positioning need not stand in the way of more EUR weakness by the time of the meeting. We think that President Draghi could surprise on the dovish side and trigger renewed move lower in EUR.

 

Reasons for the ECB to be more dovish in April than in March/Feb:

 

1/ Weaker than expected March HICP - Temporary factors may have played a role (e.g. early Easter boosting March inflation in 2013) and a payback in the form of stronger inflation print maybe due in April. That said, the March print goes against ECB’s expectations of low but stable inflation ahead. In addition, core CPI corrected to the downside again reversing previous increase (Figure 1). Recent history would suggest the ECB has responded to cyclical lows in HICP inflation by cutting rates last May and November. Core CPI revisited levels that were associated with ECB action in the past as well. We think that President Draghi could highlight on Thursday that downside risks to inflation have grown of late. A rate cut (not Citi’s central case) cannot be excluded either.

 

 

2/ The drain of Eurozone excess liquidity is pushing money market rates higher again highlighting the need for more action in the form of suspended SMP sterilization (Figure 2). Credit crunch remains a worry and sentiment indicators came off their recent highs in March in part because of recent weakness in Eurozone's main trading partners. It would be difficult for the Governing Council to argue that growth and the credit outlook could improve significantly from here. We think that President Draghi could send strong signals that a suspension of SMP sterilization or FLS program are now more likely.

 

 

What would constitute a dovish ECB-outcome:

 

1/ Clear indications that the inflation outlook has deteriorated in March and signals that it could deteriorate further from here especially if EUR-appreciation persists.

 

2/ Concerns about the lack of credit growth in the Eurozone and worry about the weaker global recovery could add to the dovish ECB tone.

 

3/ Measures that could include a 10-15bp refi rate cut, a suspension of SMP sterilization and/or FLS-type of program. The latter two could be perceived to signal that the ECB is willing to consider additional unconventional measures like QE and LTRO.

 

4/ Stronger forward guidance and indications that the council has discussed measures like QE or negative deposit rates at this meeting.

And Deutsche Bank notes the hurdle to policy action is higher than they thought.

The ECB is in a policy ‘dead zone’. There are some easy policy options, like a refi rate cut or ending the sterilization on SMP. But the returns on these policies are small and hardly commensurate with fighting deflation, if it were deemed to be a risk. Jens Weidmann’s comments on QE drew a lot of attention this week. The heart of his message is that the Bundesbank is intellectually ready to contemplate QE. This in itself is an important stepping stone. This means that should the need arise, the political or “theological” hurdles to QE should not be overstated. The level of insurance we have from the Eurosystem is high, if things turn sour. This does not mean that QE can at this stage be a baseline expectation, but asset purchasing of some form is definitely a non-negligible risk this year. We can fairly easily see the central bank being dragged into QE, rather than enthusiastically and preemptively embracing it.

 

Beyond dovish rhetoric, we are not expecting the ECB to ease policy in April. The lessons from the last couple of months are that the ECB is difficult to ready and the hurdle to easing policy is high. The ‘easy’ policy options like a refi rate cut or ending SMP sterilization are hardly commensurate with fighting deflation even if it were deemed a risk. On the other hand, the major policies like ABS purchasing, targeted liquidity, negative deposit rates and asset purchasing/QE each have their own complexities and costs. In our view, the data and events since last month do not give the ECB reason to re-assess the costs and benefits.

 

For now, ECB policymaking will remain largely in the verbal arena. We can imagine a twin track communications strategy emerging from the April press conference.

 

First, there is the “de facto loosening” argument. Because of spare capacity, the ECB says it will leave policy on hold further into the recovery. All else unchanged, this also moves interest rate differentials in favour of euro depreciation. The virtue of policy inactivity will be pushed further by reference to the AQR/EBA exercise: a successful exercise improves the monetary transmission mechanism, adding more “de facto” loosening. Second, we expect ongoing allusion to policies like negative deposit rates and asset purchasing/QE.

 

 

If the euro exchange rate were to rise, a negative deposit rate might materialize. Comments from both Weidmann and Liikanen this week gave the option renewed focus. But having managed to avoid a negative deposit rate so far, one wonders whether the ECB will ever have the appetite for it. The imponderables might be too great — what happens if even one systemically relevant institution is not technically ready to implement such a policy and financial stability is threatened?

 

There would have to be a substantive deterioration relative to current forecasts, we would argue, to elicit an asset purchasing/QE response from the ECB. One trigger to have in mind would be if the range of the ECB staff inflation forecasts at the end of the 3 year forecast horizon lay completely below the “below but close to 2%” target. At the moment, the upper end of the range is about 2.3%. To move this below 1.9% will require either a strong shock or time for a slow erosion of expectations. In the absence of the former — Ukraine does not yet qualify — it will take time if QE is to emerge. The next re-assessment of staff forecasts takes place in June. Even that may be too soon.

 

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Wed, 04/02/2014 - 22:09 | 4619730 Yen Cross
Yen Cross's picture

     This is a a good piece from WSJ that looks at negative rates and their possible effects. Personally I think the ECB won't do much. The Fed. has been backing Europe from day(1).

  ECB Faces Uncharted Waters With Negative Deposit Rate - WSJ.com

Wed, 04/02/2014 - 22:22 | 4619772 kliguy38
kliguy38's picture

ECB and FED are backed into the proverbial corner. They'll jawbone for now and hope...meanwhile the boyz will give them the cover they need to print this year when they flush the market as soon as they load up the suckers.......i'd say they have a lot on board already but only they know their timetable

Thu, 04/03/2014 - 07:13 | 4620478 GetZeeGold
GetZeeGold's picture

 

 

Set printers for warp 9......engage.

Wed, 04/02/2014 - 22:15 | 4619748 Lets Buy The Dip
Lets Buy The Dip's picture

They prop up the market. I have learnt in my years watching the market do not fight the fed, no matter how much bullshit they spread. I did see some very SHOCKING studies, about the market crashing every 7 years in the last 20 years wow. Check it out here => http://bit.ly/1hj3Zwr It means there could be another one comes soon, if this pattern keeps up. Hmmmm

Wed, 04/02/2014 - 22:50 | 4619842 CrashisOptimistic
CrashisOptimistic's picture

Nah, forget history.  There is none.  Fonz had this right the other day.

The market is too big to fail.  People will die if there's another crash now because there hasn't been a recovery.  Any significant decline will be circuit breakered and prices restored overnight on the justification that -- it was HFT. A flash crash.  The prices will be returned to their level the previous day.  All trades yesterday broken.

And for the next 48 hrs thereafter no trades will be permitted at a lower price.

In other words, stop.  There is no market.  Buy farmland.

Wed, 04/02/2014 - 22:55 | 4619825 Soul Glow
Soul Glow's picture

The ECB are printing like madmen!  WTF are you writing about author!  They have rates near zero!  The policy is unprecedented!

Does the author understand what having low rates mean?  It means they are selling as much debt as possible.  The rate has a direct correlation to debt issued.  

Is it comparible to China's shadow bank loans?  To Abe's quiver of arrows?  To Janet Yellen's QE?  This is up for debate, but what is not is that the ECB, like all central banks, are employing loose monetary policy - and have been for 5 years - to prop up an insolvent banking system.

Thu, 04/03/2014 - 05:52 | 4620284 Ghordius
Ghordius's picture

and what would happen if the ECB would revert this indeed unprecedented ZIRP policy? hot money would rush in again. thanks, but no, thanks

at the end, the EUR is not big enough to resist FED rate policy (only big enough for all the other stability purposes, which is the whole reason of it)

yet the consequences of ZIRP in the eurozone aren't what you are arguing in your sentence "Does the author understand what having low rates mean?  It means they are selling as much debt as possible.  The rate has a direct correlation to debt issued."

check the other ZH articles, debt issuance is still going down in the eurozone, not up. to the great chagrin of all the bankers and economists who see debt growth as the only growth, and growth as the only way to live, work, trade and square accounts

so it's definitely not "The ECB are printing like madmen!", neither in the implied ultra-low rates effect nor in the more conventional sense of the phrase, i.e. buying up sovereign debt (another thing that is not growing like mad in the eurozone)

it's interesting though how much effort it's being done to convey the impression that the FED is "tapering" and the ECB is "printing"

I tend to agree with ZH that the ECB will continue to sound dovish and act hawkish, or, better, just do nothing. only a substantial change in the flow of money in our out of the eurozone would warrant a change, at this time

disinflation? Yes, yet mainly because the energy price component is going down. that's the best kind of disinflation, and a metric that is not even included, in the US. who would want to fight that? in a ZIRP environment? or, alternatively, isn't this a "problem" that could be "solved" by an energy tax? and again, how could the eurozone go back to normal, sane rates as long as the USD is available in near unlimited quantities for the price of nearly nothing, ready to be used for carry trade?

and don't get me started on that "asset aging" thing. nobody has ever done a serious assessment available on the net on how the eurozone banking system really works

and no, there are quite substantial differences to the US and UK, particularly on how the real economy is financed. in fact, it's this very conventional, oldfashioned, archaic banking system (megabanks excluded) which is showing signs of needing higher rates, eventually

-----

oh, and I see that the legend that "the FED finances europe" is still alive and kicking. lol. what's next? "the FED finances Asia"? It's comparable to the fable of "the FED and the ECB being joined at the hip" (conveniently forgetting the megabank "connecting tissue")

Thu, 04/03/2014 - 05:16 | 4620369 TeraByte
TeraByte's picture

See the sunny side now. By staying put on verbal ECB temporarily halt the printing press.

Thu, 04/03/2014 - 03:56 | 4620316 fukidontknow
fukidontknow's picture

Gosh I'm glad that someone's looking after us - imagine how dreadful lower consumer prices would be. Thanks Mario. 

Thu, 04/03/2014 - 05:03 | 4620360 jubber
jubber's picture

well if the last few meetings are anything to go by  European indexes will gap up, 100 points for the DAX, nothing will be done and like magic we will be at new highs, and any recent shorts taken out, US Indexes will leap at the same time, rinse repeat.

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