Daily Insight
Group Economics Macro & Financial Markets Research
08 September 2016
Where you going to find the bonds Mario? Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
ECB view: QE extension and measures to expand universe of bonds expected - We think the ECB will expand the time horizon of its QE programme from March 2017 currently to September 2017 at today's meeting. The momentum behind the eurozone recovery has slowed and the overall pace of economic growth remains too moderate to generate significant underlying inflationary pressures any time soon. Indeed, the ECB will most likely continue to project that inflation will undershoot its goal over the medium term in its September forecast update. The ECB will most likely also need to announce changes to its QE programme to increase the universe of eligible assets as it will not be able to meet even its current targets under the existing structure. We think there are two possible options (either separately or in combination). The ECB could decide to start buying bonds that yield less than the deposit rate (so far restricted) as well as buying bonds below the 2y maturity. Second, it could increase the issue/issuer limit from the current 33%. We think that another often-mentioned option – the dropping of the capital key allocation system for purchases and moving to an outstanding debt allocation scheme – is not likely. Such a move is supported by only a minority of the Governing Council at this time and the ECB will likely opt for other options first. (Nick Kounis) UK Macro & FX: Upgrading growth forecast, BoE now see on hold – Following recent stronger than expected economic data, we are upgrading our view on the UK economic outlook. In the aftermath of the UK’s vote to Brexit we downgraded our forecast to incorporate a moderate recession. Recent survey evidence suggests the economy is holding up better than expected and has instead settled into a modest growth trajectory. It could be that the uncertainty shock that we expected is less severe because the actual Brexit looks like such a distant prospect (it may not happen until 2020). Of course the adverse effects could come at a later point depending on the trade negotiations and the path of growth is in any case lower than expected before the vote. Overall, we have revised our 2016 and 2017 UK GDP forecasts up to 1.9% and 1.3%, respectively, from 1.5% and 0.5% previously. Given that the BoE is factoring growth close to our previous scenario (0.7% for 2017), we also no longer expect another interest rate cut. The improved outlook has meant we have made significant upward revisions to our sterling view. EUR/GBP is now seen at 0.83 and 0.79 at year end 2016 and 2017, respectively from 0.92 and 0.81, previously. Meanwhile, GBP/USD is now at 1.33 and 1.40 for those time horizons from 1.20 and 1.35 before. (Nick Kounis & Georgette Boele) US Macro: Services ISM suggests September Fed rate hike is unlikely - August’s ISM non-manufacturing survey, which is a gauge of service activity, slowed to 51.4 from 55.5 the previous month. This is the largest decline since 2008. Looking at the details of the survey, the new orders index registered the sharpest fall to 51.4 from 60.3 in July. The Employment Index decreased in August to 50.7 from 51.8. The service sector has been the main contributor of job growth in the past months. We think that US GDP growth in the next two quarters will remain moderate at around 2%, though the composite ISM (taking the services and manufacturing together) is consistent with 1% growth. Still, the sharp fall could prove to
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Daily Insight - Where you going to find the bonds Mario? - 08 September 2016
be an aberration. Incoming monthly hard data released up until now suggest a strong third quarter, reaching around 3% according to tracking estimates. Nevertheless, the ISM report will certainly make the Fed more cautious in considering a rate hike in September. We expect the Fed to hike again in December and resume a very slow pace of rate hikes next year. (Maritza Cabezas)
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Daily Insight - Where you going to find the bonds Mario? - 08 September 2016