Tomorrow morning Mario Draghi is widely expected to if not announce an extension, or expansion, of the ECB's QE program, than to at least jawbone sufficiently, and push the EURUSD lower from its recently anchored level in the 1.10-1.20 range. But what are the specifics of Draghi's announcement: will he merely expand the monetization limit per security, as he did in early September [23], will he increase the universe of eligibile securities, or will he simply extend the maturity of the non-open ended QE from September 2016 to some indefinite date?
It is unclear: the one thing we do know with certainty is what Draghi has said before he will never do, which is to buy gold [24].
As to what he may do, there are many opinions. The following list, courtesy of Bloomberg, summarizes what the sellside universe believes Draghi will unveil in just under 12 hours:
- Most banks expect ECB to ease policy further, probably as early as Dec. and in the form of a QE extension, according to analysts.
- At this week’s press conference to be held in Malta, Draghi is expected to use dovish rhetoric, which may push EUR lower at least temporarily, while leaving monetary policy on hold
- Further deposit-rate cut seen as most powerful tool to weaken EUR, even as economists assign low odds for this to be announced before yr end as it may require a worsening of euro-zone financial conditions
- Expectations for more easing increased after ECB’s Nowotny said Oct. 15 that both headline and core CPI are ‘clearly’ missing central bank’s target, although the GC member said on Oct. 18 policy makers may not extend QE any time soon
- Survey conducted by Bloomberg show economists expect ECB to step up QE by Jan. 2016. Below are more details of such expectations, based on published research and interviews:
BARCLAYS (team incl. Nikolaos Sgouropoulos, Cagdas Aksu)
- WHEN: Expect announcement of QE time extension in Dec. when ECB updates 4Q 2015 staff economic forecasts
- HOW: ECB has 2 main options to provide more accommodation; first, making QE more expansive; second, introducing possibility of deposit rate cut more openly, or delivering it
- First option more likely at this stage; the easiest way would be to lengthen end-date from Sept. 2016 by 6-9 months to 1Q-2Q 2017; this is already expected by mkt
- IS A DEPOSIT RATE CUT LIKELY: Don’t rule it out but remains unlikely for next two meetings; a likely trigger for rate cut would be further material appreciation of EUR, possibly related to more signs that Fed will stay on hold for longer
- EXPECTATIONS FOR OCT. 22: Continuation of dovish rhetoric
- ’’We think that it is just a matter of time until the ECB decides to drive EUR/USD lower’’
CREDIT SUISSE (team incl. Christel Aranda-Hassel)
- WHEN: More ECB monetary policy accommodation is in pipeline, probably in Dec.; EUR is key trigger for more action; if it trades above 1.15/USD and toward 1.20 in run-up to Thursday’s meeting, we would bring baseline Dec. QE extension forward to Oct. meeting
- HOW: Baseline scenario is that ECB will state that QE is extended to March 2017 or beyond
- IS A DEPOSIT RATE CUT LIKELY: Cutting the deposit rate further and/or increasing purchased amount would require a more significant deterioration in CPI outlook
- EXPECTATIONS FOR OCT. 22: Below and up to EUR/USD 1.15 in run-up to Thursday’s meeting, expect no action from ECB and a very dovish press conference, which leaves the door wide open for action in Dec.
GOLDMAN SACHS (Dirk Schumacher)
- WHEN: ECB may ease further at Dec. or Jan. meetings
- HOW: By extending purchase program until mid-2017, with a tapering from Jan. 2017 onward
- IS A DEPOSIT RATE CUT LIKELY: A sharp appreciation of EUR may prompt a further reduction in deposit rate; not base case scenario
- EXPECTATIONS FOR OCT. 22: On hold, Draghi to adopt a strongly dovish undertone: MORE
- ’’Coming policy meetings are pivotal if the ECB wants to re-establish its credibility. It is decision time for the ECB’’ strategists incl. Robin Brooks say in client note
BOFAML (team incl. Gilles Moec, Athanasios Vamvakidis)
- WHEN: Pushes central case for QE2 from Oct. to Dec.: MORE
- HOW: By Dec. ECB would probably need to deliver not only an extension beyond Sept. 2016 but also an expansion with “delta” in purchases possibly being directed toward corporate bonds
- IS A DEPOSIT RATE CUT LIKELY: Don’t expect it; it would be a surprise for mkt as very little is priced in and Draghi said that deposit rate has reached its floor; an even lower rate may complicate QE implementation
- EXPECTATIONS FOR OCT. 22: It remains a “live” meeting; communication could be complicated for Draghi; if he comes out too hawkish, there is a risk that euro exchange rate could go through a knee-jerk leap
- ’’We think the more the ECB waits, the more it will have to do to convince the market it can deliver on its price stability objective’’
UNICREDIT (team incl. Marco Valli)
- WHEN: More easing may be announced in first months of 2016, March at latest: MORE
- HOW: Expect ECB to boost QE by another EU300b-400B after Sept. 2016
- IS A DEPOSIT RATE CUT LIKELY: Think QE2 is much more likely than a deposit rate cut
- EXPECTATIONS FOR OCT. 22: Expect no action and dovish rhetoric, mainly intended to stem EUR appreciating trend
- ’’It seems that a EUR/USD at 1.15-1.20 may represent a sort of pain threshold. This implies that dovish rhetoric is very likely to continue and, possibly, intensify this week’’
BNP PARIBAS (team incl. Ken Wattret)
- WHEN: Dec. is the most likely timing of a move, in tandem with review of ECB’s staff macroeconomic projections
- HOW: Expect an extension of ECB’s asset-purchase program beyond Sept. 2016; also expect monthly volume of purchases to be increased by EU10b
- IS A DEPOSIT RATE CUT LIKELY: It would come into play if changes to asset-purchase program fail to have desired effect on euro-area conditions: MORE
- EXPECTATIONS FOR OCT. 22: Press conference should leave the door ajar for a lower deposit rate, as ECB aims to lean against tightening of financial and monetary condition
- ’’We would not rule out a surprise policy change as soon as this week. We put the chances at around 40%’’
HSBC (Fabio Balboni)
- WHEN: Expect program to be formally expanded in Dec.
- HOW: By dropping the reference to Sept. 2016 and making it effectively open-ended
- IS A DEPOSIT RATE CUT LIKELY: Unlikely as it would be in contradiction with policy of balance-sheet expansion
- EXPECTATIONS FOR OCT. 22: Expect ECB to forcefully reiterate commitment to expand program if necessary without delivering any actual change
- ’’We won’t have a formal expansion of the size of monthly purchases for now. Otherwise, as the constraints become apparent, the ECB might face considerable credibility problems if inflation doesn’t revert quickly’’
DEUTSCHE BANK (Mark Wall, Marco Stringa)
- WHEN: ECB to act further in Dec.; changed call Oct. 2 saying that further QE is no longer just a risk: MORE
- HOW: Expects a 6-month flexible extension of QE
- IS A DEPOSIT RATE CUT LIKELY: QE extension is more likely than a deposit rate cut
- EXPECTATIONS FOR OCT. 22: Council will likely sound increasingly dovish, but is unlikely to take concrete action in absence of negative shocks
- ’’A depo cut would need to be designed to incentivize lending to SMEs to be effective. Otherwise it might not compensate for the cost of the policy U-turn’’
CREDIT AGRICOLE (Valentin Marinov)
- WHEN: ECB may ease further in 1Q 2016
- HOW: By extending duration of asset purchases beyond Sept. 2016, initially; also expect ECB to leave door open for increase in amount of monthly buying
- IS A DEPOSIT RATE CUT LIKELY: Depo rate cut not part of Credit Agricole economists’ base case, though wouldn’t rule out another decrease to boost impact of any additional QE measures
- EXPECTATIONS FOR OCT. 22: On hold; ECB to downgrade economic outlook and signal QE would be extended beyond Sept. 2016; investors should watch for hints from Draghi that additional easing will be occurring before long
- ’’We expect the ECB to extend QE in 1Q 2016 and this should help reinstate the negative relationship between EUR and QE’’
NOMURA (Nick Matthews)
- WHEN: ECB may ease further by March 2016 meeting, at the latest; whether policy makers act at Dec. meeting, or at least signal that further action may come in 1Q 2016, may be a close call given international developments and stronger EUR
- HOW: By extending asset purchases to end-March 2017 or beyond
- IS A DEPOSIT RATE CUT LIKELY: Don’t expect a depo rate cut to be part of ECB’s next round of easing
- EXPECTATIONS FOR OCT. 22: On hold; expect ECB to sound dovish and emphasize willingness and ability to act, if warranted; also see continued signal that focus for next round of easing remains on flexibility of asset-purchase program
CITIGROUP (team incl. Guillaume Menuet)
- WHEN: Baseline for Dec. meeting
- HOW: Expect ECB to announce that it intends to extend or expand pace of asset purchases; an extension is the slightly more likely option
- IS A DEPOSIT RATE CUT LIKELY: Not baseline; some unexpected EUR appreciation together with more evidence of EM mkts slowdown would likely prompt a re-think about whether -20bp deposit rate is really the lower bound
- EXPECTATIONS FOR OCT. 22: ECB will likely conclude that more time is necessary before announcing further policy easing
- ’’Increasing the size of the public-sector purchase program on Oct. 22 remains a possibility for GC, but the hurdle seems higher’’
MORGAN STANLEY (team incl. Elga Bartsch, Hans Redeker)
- WHEN: If updated ECB forecasts in Dec. show there are renewed downside risks to CPI, ECB could act further
- HOW: If ECB acts, expect combination of a reduction in depo rate and faster pace of purchases to be more effective than a simple extension of program; it also might be easier to agree on than an extension of purchase program well beyond Sept. 2016 for some of the hawkish members
- IS A DEPOSIT RATE CUT LIKELY: Attach a probability of 1 in 3 to ECB acting this wk
- If ECB was to embark on concrete policy actions, it would probably up pace of QE above EU60b/month, add to overall size of QE program beyond EU1.14t, and consider a reduction in deposit rate to widen the pool of eligible assets ECB can buy at shorter maturities
- Say a 10bps ECB deposit rate cut is likely to be the most effective measure to limit the scope for EUR appreciation: MORE
- EXPECTATIONS FOR OCT. 22:On hold, stressing its determination to act, if needed; expect ECB to open the door further to possible policy action at Dec.
RBC (Timo Del Carpio, Peter Schaffrik)
- WHEN: Dec.
- HOW: Expect either a 6-mo. extension or even a rolling 6-mo. extension until further notice
- IS A DEPOSIT RATE CUT LIKELY: EUR short end has become rich on the back of rate cut “fantasies”; if there’s any mention of “all options being open” would propel the market substantially higher and the short end even richer
- EXPECTATIONS FOR OCT. 22: On hold; the lack of a conclusive message from economic data mean policy bias to stay ’waiting and seeing’; MORE
RBS (Giles Gale, Michael Michaelides)
- WHEN: Expect QE to be both extended, possibly to March 2017, and accelerated to EU90b per month at the Dec. meeting
- HOW: By extending beyond Sept. 2016 and increasing the monthly pace to EU90b
- IS A DEPOSIT RATE CUT LIKELY: Not RBS’s base case
- EXPECTATIONS FOR OCT. 22: This meeting isn’t live for more action; GC members have been categorical as can be expected that extension isn’t yet on the table
JPMORGAN (Gianluca Salford, Fabio Bassi)
- WHEN: Most likely dates for further stimulus are Dec. this year and Jan. 2016
- HOW: The bulk of any additional stimulus will have to come from an increase in govt bond purchases with main bottleneck coming from the low stock of German bonds; doubt ECB will be in a position to deliver more than an increase of the monthly pace to EU70b-EU80b and extension to Dec. 2016 or March 2017
- IS A DEPOSIT RATE CUT LIKELY: It will be very difficult for ECB to deliver a rate cut after having delivered and maintained over past year a consistent message in which policy rates are at the floor lvls
- EXPECTATIONS FOR OCT. 22: Expect Draghi to keep his options open
SUNRISE (Gianluca Ziglio)
- WHEN: Best case for an extension is March
- HOW: ECB may go for an extension; expanding size very unlikely as ECB will already find it hard to do EU60b/month at year-end
- IS A DEPOSIT RATE CUT LIKELY: No as have said they are done on rates
- EXPECTATIONS FOR OCT. 22: Don’t expect much from ECB until year-end as bank needs to see how end of year/Jan. base effects on energy inflation play out early next year
UBS (Reinhard Cluse)
- WHEN: Don’t expect any change to QE, even in Dec.; base case is ECB will run QE in its current form or EU60b/month until Sept. 2016, followed by some form of tapering
- IS A DEPOSIT RATE CUT LIKELY: No. When they cut last year, Draghi said it is at the lower bound, a sentiment Coeure repeated more recently so any cut would come at cost of ECB credibility
- EXPECTATIONS FOR OCT. 22: Not adding new stimulus may disappoint some mkt participants, making it important the ECB carefully calibrates its message; expect Draghi to leave door open for more accommodation in Dec.
IHS GLOBAL INSIGHT (Howard Archer)
- WHEN: Most likely ECB will extend QE, possibly in Dec.; if 3Q GDP growth holds up relatively well, may wait until New Year
- HOW: Any further ECB action would be most likely through increasing and/or extending QE
- IS A DEPOSIT RATE CUT LIKELY: Draghi has repeatedly stated that interest rates have reached their lower bound
- EXPECTATIONS FOR OCT. 22: Draghi will deliver a dovish message, saying ECB is focused on downside risks to euro zone inflation and growth
ABN AMRO (Hyung-Ja de Zeeuw, Nick Kounis)
- WHEN: Expect announcement of extended and larger ECB QE before yr-end
- HOW: Will extend QE beyond Sept. 2016, increase monthly purchases to EU80b vs EU60b; list of eligible assets will be broadened to include more utilities: MORE
- IS A DEPOSIT RATE CUT LIKELY: Don’t think that a deposit rate cut will be the ECB’s first port of call, but we think it is certainly an option at a later stage
- EXPECTATIONS FOR OCT. 22: We could get a clearer idea of future ECB action
* * *
Clearly, nobody really has any idea what is about to happen tomorrow, yet one thing which is far more critical than any of the opinions voiced above, is that just like the Fed, the ECB too is trapped. On one hand, it is suffering a collapse in inflationary expectations, seen not only via the tumbling 5Y5Y, but through real 10Y yields.
[25]
On the other hand, as the chart below shows, if the ECB announces an extension until September 2017, which is virtually guaranteed, the ECB will soon approach the limit of monetizable debt, especially in Germany, Portugal and Finland, as well as Slovakia and Slovenia, that the ECB can monetize without adversely impairing even further the already scarce liquidity of Europe's bond market.
[26]
