The Dice Are Loaded Against ECB Turning Hawkish Prematurely

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by Tyler Durden
Tuesday, Sep 07, 2021 - 06:30 AM

By Ven Ram, Bloomberg macro commentator and reporter

Between now and the end of this week, reams and reams will be written about the European Central Bank’s policy review for September. Yet, after it’s all done and dusted, it may not have moved the markets’ needle very much on trading euro-area securities.

While there have been several voices seeking an immediate slowing of the ECB’s stimulus, it’s not clear if their numbers are strong enough within the Governing Council to sway the consensus for a reduction of pandemic-related bond buying from the fourth quarter.

Euro-area bonds have mostly rallied this quarter, coinciding with a period when the ECB vowed to persist with an increased pace of bond-buying. Bund yields are at odds with the evolution of money markets and the trajectory of inflation, both in the direction they have marched and in their current valuations. In other words, financing conditions in the region are looser than they need to be. While the ECB will undoubtedly take that into account as it begins its deliberations, it may still choose to persist with a faster pace of purchases to persist with the messaging that it means business on kindling longer-term inflation.

Source: A Blueprint Of PEPP Tapering

Apart from that decision, the ECB will choose to buy time before deciding on other, perhaps more important, questions looming before it: Should it wind down the PEPP program as planned? Should it expand the size of the longer-running asset-purchase program, and if so, by how much? Should it also incorporate some of the flexibility of PEPP buying into APP? Should the ECB be more careful about characterizing the path of inflation?

If the ECB decides to slow its pace of bond purchases in the fourth quarter, bunds may sell off a measured 15-20 basis points over the course of a few weeks but still trade at a premium.

Apart from that, it’s hard to see the upcoming ECB meeting marking a bigger milestone for the markets. So much for a meeting that is being billed as live.