Market has Now Fully Priced In Another 1 Trillion LTRO
Just over a month ago we laid out the market's key indicator for whether NEW QE (or the just as fungible LTRO / unsterilized money printing from Europe) was likely. The 5Y5Y forward inflation expectation has been invaluable in front-running decisions by the world's anti-deflation central banks. What is amazing is that the market has become so conditioned now to the glut of easy money (knowing deep down it fixes nothing but needing that fix for their 'assets') that based on this framework, it appears inflation expectations have now priced in another EUR1 trillion worth of LTRO. We strongly suspect, given the one-year highs in inflation expectations that the Fed will disappoint in September (no matter how much insanity Rosengren spouts) but Draghi will come under increasing pressure not to disappoint (like he did last time).
Notably the various extreme monetary policy measures have had less and less impact on inflation expectations.
Of course we already pointed out that the critical sovereign bond markets have seen straight through this but equities remain priced for this occurrence. Given our recent comments on the drought of collateral availability to the most-in-need banks, it would appear that even if the ECB offered it, Spanish and Italian banks would struggle to soak it all up - and in the meantime, the encumbrance and stigma would be immense...
Be careful what you wish for once again...
Note: the 5Y5Y Inflation expectation is simply what the market is implying that 5Y inflation breakevens will be in 5Y time - so a medium/business-cycle perspective on where the business cycle will be is perhaps a way of considering it.