ECB: Bank Thoughts Now on the ECB. 10-20bps Depo cuts in Sep? QE Restart?

ITC – ECB Market React:

– ECB adopts a symmetrical approach to inflation. Tasks committees to look at options. Econ recovery has disappointed ECB. Clear that governing council lacks unanimity.

– The ECB press conference failed to live up to the dovishness of the Statement. Lack of unanimity and talk of tasking committees to look at all options was underwhelming. Bunds started to plummet, Bund-BTP spreads re-widened (they had narrowed after the Statement) and EMG carry trades were unwound.

– We didn’t see anyone changing their ECB forecasts, unless they had expected action this week. Market had been considered long. Bunds attract almost neutral carry at 10y and negative in shorter end so it looked like a long liquidation. After the press conference, put buying was evident.

– Swap spreads were extremely active around the ECB. From a 9k done at 1227BST (just before ECB) until session close, we counted 37.5k of 2y Schatz invoice spreads done and 19k of Bund spreads (modest bobl spread volumes). The buxl spread led the narrowing and fell 1.6bp to 44.4bp. Others declined quickly too.EURUSD cross-currency basis swaps also big movers lower, particularly early on during the session.

– Bund yield closed +1.4bp at -0.365% (4.15pm), with shorter and longer yields rising slightly more. Bund-BTP spread almost unchanged at 188bp.

– After mkt:

-Sources: ECB policymakers see deposit rate cut in September as almost certain; more government bond buys, guidance change also likely; ECB buying stocks, bank bonds seen as non-starter; some ECB policymakers still need to be convinced about tiering system; ECB policymakers have been presented with option of moving to targeting average inflation

-ECB Sources: Ecb has significant cohort who doubt tiering is best solution; Some ECB officials questioned effectiveness of restarting QE

Banks Thoughts from here:

– MS: MS expect a 10bp depo rate cut to -0.50% in September and a new buying programme in 4Q. By stressing the symmetry of its inflation aim, the ECB is likely to implement extra stimulus for longer.

– NWM: NatWest Markets have maintained their ECB views after yesterday (10bp cuts and small QE programme in Sept of €30bn pcm for 6 months) but would also now expect “the possibility of a tiering scheme announced as soon as in September as well, which would open the way to the possibility of deeper rate cuts in a not so distant future”

– GS: GS European economists maintain their expectations for a September easing package, including a 20bp rate cut and an overall QE program (including both sovereigns and corporates) in the realm of €250-300bn. 

– Commerz: Commerz expect the ECB to deliver a 20bp depo rate cut in September. Apparently the design of a tiering system is “pretty complex and needs preparation”. This decision will ultimately determine the impact on money markets and banks (for the variations the ECB could consider)

– QE: Commerz expect the ECB to re-launch its asset purchase programme in a similar composition as before at €40bn per month for a duration of nine months, or longer if necessary. The issuer and ISIN limits should then be lifted to 50% as the capital key remains the guiding principle and the limits thus binding for Bunds.

– Forward Guidance: The calendar-based element could be de-emphasised while the state-contingent part could be upgraded, for instance via combining it with the ECB’s new communication about the symmetry of the inflation aim. In general, as argued before, more indications about tolerance of inflation overshooting would fall short of a price level target, but could achieve more accommodation at times when rates and €QE are getting exhausted.

– Citi FX Strategy: Citi’s base case for September remains a 10bp deposit rate cut, EUR30bn/month of government and corporate bond purchases for 12 months, tiering of excess reserves and further strengthening forward guidance

– Danske: It is a matter of how the ECB will act, no longer if. The ECB tasked committees to examine the potential QE restart, rate cut, tiering and forward guidance, although there were no details on rate cut size, QE size, limits etc.

– The economic assessment in the statement was virtually unchanged although Draghi said that the economic outlook is ‘getting worse and worse’ as well as ‘inflation expectations declining’.

– Draghi went to great lengths to emphasise symmetry in the inflation mandate where both realised and projected were mentioned.

– Markets will keep speculating about the composition of the stimuli, but were somewhat disappointed with the lack of details

– In Danske’s view this has set the scene for a deposit rate cut, which they expect to be announced at the September meeting (they expect a 20bp rate cut), paired with a restart of the QE programme and extended forward guidance

– Investec: Investec see the steers provided by the ECB President yesterday as consistent with their view that the ECB will look to ease the stance of policy in September. They maintain their view that we will see a cut in the deposit rate at that time (sep). The work that has been mandated to Eurosystem committees also raises the likelihood that the ECB could accompany any deposit rate cut with other supportive measures, not least a restart of net QE. President Draghi would not be drawn y’day on the likelihood of any particular easing route, but instead talked about optionality. Interestingly Investec note that in previous instances where the deposit rate has been lowered, such easing has been accompanied with other forms of policy accommodation being added.