Daily Insight Five factors the ECB will watch
Group Economics Macro & Financial Markets Research
Nick Kounis, +31 20 343 5616
11 June 2015 • • •
ECB QE has been a dominant theme in markets - the timing of QExit will also be a big deal We set out the five big factors the Governing Council will be looking at to decide on policy… …they are growth momentum, inflation, financial conditions, Fed rates and Grexit
Timing the QExit
0.70%. Financial conditions have been tightening recently. If
At last week's press conference, ECB President Mario Draghi
this trend was to continue, the ECB would be minded to
set out the ECB's intention to continue asset purchases
eventually step up QE or to announce a later QExit than
through to at least September 2016. Indeed, if needed, the
September 2016. However, the first step would be verbal
ECB would extend QE beyond that date. QE has been a major
intervention to hint that tighter financial conditions threaten the
force in financial markets and the exit from QE or QExit will
growth outlook.
also likely be a big deal. Below we set out the five big factors Mr Draghi and his colleagues will watch as they assess the
Fed interest rate normalisation
outlook for QE. Our base case is that the ECB will wind down
One of the big themes of the last year has been monetary
the programme in September of next year.
policy divergence. But divergence between the world's two major central banks can only go so far. Decisions by the Fed
Growth momentum
also impact the ECB via their influence on EUR/USD and vice
The ECB expects the economy to maintain its recent growth
versa. We expect the Fed to hike interest rates in September
momentum, with quarterly growth rates in the 0.4-0.5% range.
of this year and at a slow pace thereafter. This should support
Signs that economic growth is at least matching those rates
the dollar and put downward pressure on the EUR/USD. The
would be needed set the scene for a QExit in September 2016.
knock effect will be that the ECB will more likely stage a QExit
As well as standard activity indicators, an ongoing downward
in September of next year. In contrast, if the Fed further delays
trend in unemployment and recovery in bank lending would be
interest rate normalisation, the dollar will weaken and
needed to increase the ECB's conviction that the economic
EUR/USD could rise. This would make it more likely that the
recovery will be sustained.
ECB would need to ease policy more than planned.
Inflation and inflation expectations
Grexit would delay QExit
The ECB's sole goal is to achieve rates of inflation of close to
We expect Greece to eventually reach a deal with its
but below 2% over the medium term. With inflation below
creditors/European friends and partners, though it will take a
target, an ongoing economic recovery is a crucial condition to
while longer and will continue to be a bumpy ride. However,
meet the goal. However, the Governing Council will also likely
there is a risk that if they fail find an agreement it could set off
want to see signs that actual inflation is heading in the right
a chain of events that could eventually lead to a Greek exit
direction. Crucially, core inflation should bottom out this year
from the euro. Contagion would probably be less severe and
and start to accelerate next year. Furthermore, market-based
sustained than it would have been in the past. Nevertheless, it
and survey measures of inflation expectations should trend up
would be would certainly have a significant impact. In such a
towards historical averages. In our view, higher rates of actual
scenario the ECB would likely step up QE.
inflation should also push up medium to long term inflation expectations, given the correlation between the two.
In addition, it could even launch the OMT. Peripheral government bonds would be in the firing line given a Grexit.
Financial conditions
The OMT programme would allow the ECB to buy more
The ECB sets monetary policy with a view to shaping the
peripheral government bonds than designated under the
financial conditions necessary to ensure a certain growth
capital key approach of its QE programme. While QE is
trajectory consistent with its inflation objective. In its June
focused on monetary easing, the OMT was designed as a
forecast update it assumed the EUR/USD would be around
safety net for vulnerable countries in case of financial market
1.12 this year and the weighted average European bond yield
stress triggered by worries about their future in the euro.
at 1.3%, roughly consistent with a 10y Bund yield of 0.65-
2
Five factors the ECB will watch – 11 June 2015
Financial markets Currency markets
Close
Change 1 day
Change 5 days
Change YTD
EUR/USD USD/JPY
1.1314
0.0885
0.2303
-6.4959
122.75
-0.0163
-1.4294
2.4282
AUD/USD
0.7757
0.0387
0.9369
-4.9969
USD/CHF
0.9320
0.0859
-0.1072
-6.2280
NZD/USD
0.7194
-0.0695
0.9401
-7.7101
GBP/USD
1.5524
0.1096
0.9232
-0.3658
USD/SGD
1.3421
-0.0298
-0.3268
1.3212
USD/CAD
Bond markets
1.2267
Close
-0.1059
Change 1 day
-1.6595
Change 5 days
5.6134
Change YTD
2-year German Govt Bond yield
-0.1640
-0.0050
0.0180
-0.0660
10-year German Govt Bond yield
0.9810
0.0310
0.0990
0.4400
Yield curve Germany
1.1450
0.0360
0.0810
0.5060
2-year US Treasury Bond yield
0.7310
0.0141
0.0585
0.0665
10-year US Treasury Bond yield
2.4838
0.0454
0.1196
0.3126
Yield curve US
1.7528
0.0313
0.0611
0.2461
US 2-year sw ap rate
0.9869
0.0066
0.0779
0.0926
US 10-year sw ap rate
2.5618
0.0200
0.1555
0.2757
US sw ap curve
1.5749
0.0134
0.0776
0.1831
EU 2-year sw ap rate
0.1450
-0.0005
0.0180
-0.0300
EU 10-year sw ap rate
1.2880
0.0000
0.1622
0.4760
EU sw ap curve
1.1430
0.0005
0.1442
0.5060
-0.0140
-0.0010
0.0000
-0.0920
0.2855
0.0033
0.0068
0.0299
-0.0100
13.4000
1.2500
Euribor 3 Month ACT/360 ICE LIBOR USD 3 Month JPMorgan EMBI Plus Sovereign S
388.6900
Equity markets
Close
Change 1 day % Change 5 days %Change YTD%
Nikkei 225
20,046
-0.25
-2.09
14.87
Hang Seng Index
26,688
-1.12
-3.51
13.06
Hang Seng China Enterprises Index
13,617
-1.77
-3.53
13.62
Australian Stock Exchange S&P/ASX 200 Index
5,479
0.13
-2.79
1.25
Singapore Straits Times Index
3,326
0.93
-0.72
-1.17
Euro Stoxx 50 Index
3,526
2.02
-1.60
12.08
S&P 500 Index
2,108
1.35
-0.28
2.39
MSCI World Daily Total Return Gross USD
796
-0.09
-1.80
3.64
AEX Index
481
1.42
-1.29
13.42
-7.88
-2.42
-30.57
Chicago Board Options Exchange Volatility Index
Commodity markets Reuters/Jefferies CRB Total Return
13
Close
Change 1 day % Change 5 days %Change YTD%
227
1.52
1.27
-1.53
1,186
0.82
0.12
0.13
Generic first NYMEX Crude Light future
61
1.85
2.70
14.98
Generic first Brent Crude Oil future
66
1.17
2.88
14.50
6,030
1.09
0.32
-4.29
514
-3.52
0.54
-12.93
Gold spot USD/Oz
LME Copper 3 Months Rolling Forw ard Generic first Wheat future Chicago Board of Trade Source Bloomberg
3
Five factors the ECB will watch – 11 June 2015
Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Monday Monday Monday Monday
08/06/2015 08/06/2015 08/06/2015 08/06/2015
01:50:00 08:00:00
JP DE CN CN
GDP - % qoq Industrial production - % mom Exports Imports
1Q F Apr May May
0.6 -0.5 -6.4 -16.2
0.7 0.6 -4.0 -10.0
Tuesday Tuesday Tuesday Tuesday Tuesday
09/06/2015 09/06/2015 09/06/2015 09/06/2015 09/06/2015
03:30:00 10:30:00 11:00:00 15:00:00 16:00:00
CN GB EC US US
CPI - % yoy Trade balance - GDP mln GDP - % qoq NFIB small business optimisme - index US Job Openings by Industry
May Apr 1Q final May Apr
1.5 -2817 0.4 96.9 4994
1.3 -2533 0.4
Wednesday Wednesday Wednesday
10/06/2015 10/06/2015 10/06/2015
01:50:00 23:00:00
JP NZ CN
Machinery orders private sector - % mom Policy rate - % M2 money growth - % yoy
Apr Jun 11 May
2.9 3.50 10.1
-2.4 3.39 10.5
Thursday Thursday Thursday Thursday Thursday
11/06/2015 11/06/2015 11/06/2015 11/06/2015 11/06/2015
07:30:00 07:30:00 07:30:00 14:30:00 16:00:00
CN CN CN US US
Fixed investments - % yoy Retail sales Industrial production Retail sales - % mom Business inventories - % mom
May May May May Apr
12.0 10.1 5.9 0.00 0.1
11.9 10.0 6.0 0.90 0.1
Friday Friday Friday Friday Friday
12/06/2015 12/06/2015 12/06/2015 12/06/2015 12/06/2015
06:30:00 11:00:00 14:30:00 14:30:00 16:00:00
JP EC US US US
Industrial production - % mom Industrial production - % mom Prod. prices index - % mom Prod. prices index excl food and energy - % mom Univ. of Michigan cons. confidence - index
Apr F Apr May May Jun P
1.0 -0.3 -0.40 -0.20 90.7
0.3 0.40 0.10 91.2
ABN AMRO
0.8
3.50
1.0
0.5
92.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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