ECB Watch
Group Economics Macro & Financial Markets Research
10 March 2016
ECB delivers broad stimulus but may need to do more • Nick Kounis Head Macro & Financial Markets Research
corporate bonds and new cheaper TLTROs for banks •
Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Tel: +31 20 343 5606
However, the positive market impulse faded as President Draghi cast doubt on further rate cuts and the adoption of tiered rate system
•
Aline Schuiling Senior Economist
ECB delivered a broad package of rate cuts, increased QE including
Inflation is still seen undershooting the ECB’s goal in 2018 and it will also struggle to meet its new increased QE targets
•
We think the ECB may well need to do more in the coming months
aline.schuiling@nl.abnamro.com
Hyung-Ja de Zeeuw
The ECB’s March package
Senior Credit Strategist
The ECB announced a stimulus package on Thursday in response to the significant
Tel: +31 20 628 3551
deterioration in the growth and inflation outlook. There were three broad sets of measures:
hyung-ja.de.zeeuw@nl.abnamro.com
Rate cuts: It cut its deposit rate by 10bp to -0.4% and its refi and marginal lending rates by 5bp to 0% and 0.25% respectively. QE: It increased its monthly purchases by EUR 20 bn taking them to EUR 80bn starting in April and expanded the eligible universe to include investment grade bonds of non-financial corporates established in the eurozone. This will be done under a new corporate sector purchase programme (CSPP), which will be launched towards the end of Q2. It also increased the purchase limit for supranational bonds to 50% from 33% of the universe. Bank funding: It introduced four new TLTROs (TLTRO II) each maturing in 4 years to be conducted from June 2016 to March 2017. Banks will be able to borrow 30% of their eligible loans (to non-financial corporations and households excluding mortgage loans) as of 31 January 2016 less the amount outstanding in TLTRO I. We estimate the total potential takeup at around EUR 1.25 trillion, but it will probably be less than that. Banks will be able to borrow the funds in principle at the refi rate. However, the rate on these loans could be as low as the deposit rate of -0.4% depending on the degree to which banks step up lending to the private sector. Banks will also be able to roll the old TLTROs into the new scheme to benefit from the lower cost.
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ECB Watch - ECB delivers broad stimulus but may need to do more - 10 March 2016
Forward guidance: Apart from the above measures the ECB also repeated that ‘the Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases’. This means beyond March 2017. However, during the press conference President Draghi signalled that the ECB did not currently think it would need to cut rates further and suggested that the onus of future stimulus would be on other measures. He also seemed to rule out a tiered deposit rate system saying it was too complex. ECB projections revised drastically lower In its new Staff Macroeconomic Projections, the ECB has revised its forecasts for economic growth and inflation lower again. Eurozone GDP is expected to grow by 1.4% this year (revised lower from 1.7% in its December 2015 forecasts), by 1.7% in 2017 (was 1.9%) and by 1.8% in 2018. According to Mr Draghi the risks to the growth outlook remain tilted to the downside. Inflation still below goal in 2018 According to the ECB’s own forecasts the central bank will continue to miss its inflation target in the coming years. The forecast for inflation in 2016 was revised lower to 0.1% from 1.0%, and that for 2017 to 1.3% from 1.6%. The first estimate for inflation in 2018 is 1.6%, which is still below the ECB’s own target for price stability. The downward revision of the inflation forecast is mainly due changes in the projected oil price and trade-weighted euro exchange rate. The ECB has lowered its projections for oil prices (Brent) by USD/barrel 17 this year (to around 35) and by USD/barrel 16 in 2017 (to around 41). In 2018 it expects oil prices to be around EUR/barrel 45. The ECB now expects an appreciation of the trade-weighted euro by almost 5% this year (was stable) to be followed by stabilization in 2017 and 2018. With regard to these assumptions, it seems the central bank has erred on the side of caution. This raises the probability that it will not have to revise its inflation forecasts lower yet again in the near future.
ECB’s forecasts for GDP growth
ECB forecasts for inflation
%
%
2.0
1.7
1.8
1.7
1.9
1.8
1.7
1.4
1.5
2.0
1.7
1.6
1.5 1.1
1.0
1.0
0.5
0.5
0.0
0.0
1.6 1.3
1.0
0.1 2016
2017
2018
2016
2017
2018
September 2015
December 2015
March 2016
September 2015
December 2015
March 2016
Source: ECB
Source: ECB
The ECB may well need to do more The ECB’s March package represents a significant set of measures that will lead to an easing of financial conditions. However, the ECB may well need to follow-up with fresh measures in
ECB Watch - ECB delivers broad stimulus but may need to do more - 10 March 2016
the coming months given the sharp deterioration of the growth and inflation outlook. In particular the ECB is still projecting an undershoot of the inflation goal in 2018 on average. In addition, the euro – one of the key transmission mechanisms of its policy – ended the day higher rather than lower. The TLTRO at a negative rate, the step up of QE purchases and the addition of corporate bonds are more significant moves than expected. The TLTRO is a major positive for bank funding costs as it looks to be much more attractive than current TLTROs as well as comparable market sources of funding, such as covered bonds. As such it will help to cushion the blow from negative rates. However, the deposit rate cut is less than expected, while the absence of a tiered system and the signal that further rate cuts are less likely are also disappointing. Further changes to the QE programme may be necessary The ECB may also need to take further steps to increase the eligible universe of assets given it will struggle to meet its new EUR 80bn per month target for German securities under the capital key. Even under the existing target of EUR 60bn the programme would struggle to reach the target for German securities, as it would come up against the 33% issuer limit for the stock it owns even including regional bonds (see chart below). Adding corporate bonds to the eligible universe helps but the market is illiquid and the ECB may not manage to buy sufficient quantities of German bonds to solve the problem.
ECB’s previous QE plan already hitting limits
Corporate bonds outstanding
Purchases relative to eligible universe, %
EUR bn
200
60 50
150
40 30
100
20 10
50
QE Plus without regional bonds
SUPRA
SP
PT
NL
IT
FR
FI
DE
BE
0
AT
3
FR DE
QE Plus with regional bonds
Source: Bloomberg, ECB, ABN AMRO Group Economics
IT
ES NL BE AT
IE
PT
FI
LU SK
Non-financials by country of issuer Source: Markit, ABN AMRO Group Economics
Market impact positive at first but then fades After the announcement of the ECB’s policy package, 10y government bond yields fell and curves flattened reflecting a mixture of a smaller deposit rate cut and more QE. We also saw a rally in risky assets, with corporates and periphery government bonds outperforming. However, the moves partly reversed after a strong initial rally. Indeed, the euro rebounded to finish higher after a sharp fall initially. This reflects that the positive surprise from the announcement of the measures was undone by President Draghi’s more hawkish forward guidance on interest rates. The market verdict initially was clearly that Mario had delivered but by the end of the Press Conference investors were less positive, as doubts returned on the willingness of the ECB to do more.
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ECB Watch - ECB delivers broad stimulus but may need to do more - 10 March 2016
Good news for credits This announcement is clearly a positive for credit spreads and risky assets in general. The last time Non-financials were added to the list, spreads tightened by 10 to 15 bps after the announcement. The poor liquidity in the Non-financials secondary market will amplify the spread tightening further. However, new issuance will probably get a boost from today’s announcements and this should alleviate the drought in the primary market somewhat. We expect that the positive sentiment and the lower yields will attract more issuers, also from overseas, to the EU IG market. This could bring some alleviation, but it will also mute the rally.
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ECB Watch - ECB delivers broad stimulus but may need to do more - 10 March 2016
Day
Date
Time
Country
Monday Monday Monday
07/03/2016 07/03/2016 07/03/2016
08:00:00 09:00:00 21:00:00
DE CH US
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
08/03/2016 08/03/2016 08/03/2016 08/03/2016 08/03/2016 08/03/2016
00:50:00 08:00:00 11:00:00 12:00:00
Wednesday Wednesday
09/03/2016 09/03/2016
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Friday Friday Friday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Manufacturing orders - % mom Foreign currency reserves - CHF mln Fed Reserve consumer credit - USD bn
Jan Feb Jan
-0.7 574964 21.3
-0.2
0.0
15.3
JP DE EC US CN CN
GDP - % qoq Industrial production - % m om GDP - % qoq NFIB small business optimismem - index Exports - % yoy Imports - % yoy
4Q F Jan 4Q P Feb Feb Feb
-0.4 -1.2 0.3 93.9 -11.2 -18.8
-0.4 1.4 0.3 94.2 -14.5 -10.1
0.3 94.0
16:00:00
CA NZ
Policy rate - % Policy rate - %
Mar 9 Mar 10
0.5 2.5
0.5 2.5
0.5 2.5
10/03/2016 10/03/2016 10/03/2016 10/03/2016 10/03/2016 10/03/2017 10/03/2016 10/03/2016 10/03/2016 10/03/2016 10/03/2016
02:30:00 02:30:00 06:30:00 13:45:00 13:45:00 14:30:00 14:30:00 15/03/2016 15/03/2016 15/03/2016
CN CN NL EC EC EC US CN CN CN KR
CPI - % yoy PPI - % yoy CPI - % yoy ECB Deposit rate - % ECB Refi Rate - % ECB Press Conference Initial jobless claims M2 money growth - % yoy New loans - CNY bn Aggregate financing - CNY bn Policy rate - %
Feb Feb Feb Mar 10 Mar 10
1.8 -5.3 0.6 -0.3 0.05
1.9 -4.9 -0.4 0.05
0.6 -0.5 0.05
Feb Feb Feb Mar 10
278.0 14.0 2510 3417 1.5
275.0 13.7 1200 1780 1.5
1.5
11/03/2016 11/03/2016 11/03/2016
08:00:00 10:30:00
DE GB PL
CPI - % yoy Trade balance - GDP mln Reference rate - %
Feb F Jan Mar 11
0.0 -2709 1.5
1.5
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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