While the BOE's decision came and went exactly as expected (rate unchanged at 0.50%, no new Quantitative Easing), leading to a slight jump in the GBP but nothing too notable, all eyes now turn to the ECB in 20 minutes and whether or not Jean Claude will admit defeat and announce the end of the bank's very ill-timed decision to start tightening from 6 months ago, which as much as it is overdue, will unfortunately not happen, egos and all. Here is a complete preview, but in a nutshell the consensus is for rates to remain unchanged at 1.50%, for an announcement that downside risks have intensified, and that both lower growth and lower inflation will be forecast.
Preview per RanSquawk:
Even though some of the more bearish market commentators, including Nouriel Roubini, said that the ECB should reverse this year’s interest rate hikes to prevent another recession, the policy council is expected to keep the benchmark borrowing rate unchanged this week.
As per usual practice, attention will turn to the press conference held by the President Jean-Claude Trichet, where the head of the central bank will also announce the latest macro economic projections. Given the unexpected slowdown in economic activity from the core Euro area, as indicated by the GDP and PMI data from Germany and France, market participants will be looking for any hints from Trichet on a potential monetary policy U-turn.
Of note, the recent speech to European parliamentarians in Brussels by Trichet did not feature the ”upside risks to price stability” statement and instead, he said that risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections. The head of the central bank is also expected to say that downside risks to the growth outlook have intensified, while reinforcing the widely followed viewpoint that individual states must honour their austerity pledges. In turn, the downbeat assessment of the economy by the fiscally prudent Trichet will likely lead to a temporary flurry of risk averse trade flow.
As a result, the financial sector and in particular French banks, known for their heavy reliance on short-term funding will likely bear most of the brunt. This will also translate into a sell-off in the Eurodollar futures as market participants bet that in spite of ECB announcing an extension of its USD swap line and a resumption of its 6-month money program; that borrowing costs will remain elevated. However, market participants should remember that unconfirmed reports of ECB buying various government bonds via the SMP during the last press conference managed to offset some of the bearish sentiment. As such, close attention should be paid to the peripheral yield spreads, which remain at levels widely perceived as unsustainable. The ferocity of the selling pressure may also abate if Trichet signals that the ECB is prepared to re-introduce its 12-month money operation or even cut the benchmark borrowing rate.
The Q&A session will likely focus on the SMP program, which was recently resurrected in order to prevent contagion fears from spreading to Italy which so far has failed to convince markets of its austerity measures. Trichet is expected to defend the program, but remind market participants that the ECB will only act during times of acute stress and that this task will be passed onto the EFSF once approved later in the year. Another topic of discussion will likely be Greece, which following reports that the country will fail to meet its latest deficit reduction targets became subject to speculation of debt restructuring. However Trichet will likely refute any talk of restructuring and insist that the ruling governments across the Eurozone must take whatever measures necessary to meet the proposed deficit reduction measures.
Finally, the ECB will release updated macro economic forecasts, which are widely expected to show lower than expected GDP and inflation projections. Most recently, Standard & Poor’s said that it now forecasts growth of 1.7% in 2011 and 1.5% in 2012, down from estimates in July of 1.9% and 1.8% respectively.