Daily Insight Rising risk of ECB QE plus
Group Economics Macro & Financial Markets Research
Nick Kounis, +31 20 343 5616
1 September 2015 • • •
We see a rising risk that the ECB will step up QE at this week’s policy meeting… …meanwhile we now expect a Fed hike in December rather than September Given this, we have lowered our government bond yield forecasts, but kept EUR/USD unchanged
Changes to our monetary policy views
Eurozone inflation expectations dip with oil
We have made changes to our views on Fed and ECB
%
monetary policy. This reflects the recent turmoil on financial
2.20
USD per barrel
120 110
markets, the fall in commodity prices and ongoing downside risks to China and emerging markets and hence the global economic outlook.
2.00
100 90
1.80
80 70
Rising chances of ECB QE plus
1.60
60
We now see a much bigger risk that the ECB will step up QE as soon as this week’s meeting. We see this probability at around 40%, so it is an increasingly close call. The renewed
50 1.40 Jul 14
40 Oct 14
Jan 15
Eurozone 5y5y (lhs)
drop in oil prices, which will keep headline inflation lower for
Apr 15
Jul 15
Brent oil price (rhs)
longer is a key factor behind the rising risk of action in our view. This has also led to a sharp fall in inflation expectations,
Source: Bloomberg
as measured by the 5y5y inflation swap, that ECB President Draghi has put a lot of weight on in the past (see chart).
We see one Fed hike this year and four next So overall, we now expect one hike in Fed’s target for the fed
Our base case of no further QE ( now with a 60% chance) is
funds rate this year, compared to two previously. We continue
still supported by indications that a moderate economic
to expect four rate hikes next year, meaning a one-every-
recovery is continuing, and by the bottoming out of core
other-meeting pace.
inflation. In any case, we expect Mr. Draghi to step his dovish rhetoric at this week’s meeting.
Lowered bond yield forecasts Given the above changes we have lowered our global
Fed rate hike to be delayed to December
government bond yield forecasts. We now expect 10y Bund
Meanwhile, we have changed our forecast of the timing of the
yields to remain broadly flat over the next few months, with an
first rate hike by the Fed to December from September
end of year forecast of 0.7%. Although the economic recovery
previously. There is still a chance of a move next month, given
should gain some pace, ongoing speculation about further
the ongoing strength in the economy and the labour market.
ECB monetary easing should keep yields anchored. We still expect yields to rise next year (to 1.6% by end-2016).
However, we think that the FOMC will take a cautious
Meanwhile, we still expect 10y Treasury to rise this year and
approach given the ongoing fragility of financial markets (for
next, but the rise is likely to be more moderate than before –
instance, the VIX is still above its long-run average level).
especially in the next few months - given less Fed hikes. We
Officials may therefore decide that it makes sense to wait and
see yields rising to 2.4% by year end and 2.8% by the end of
see rather than risk rocking the boat. In addition, by December,
next year.
the Fed will also have a better insight into how China and the global economy in general are developing. With inflation
Finally, our call for EUR/USD to fall to parity by year end
subdued it may well judge it can afford to take its time.
remains unchanged as the Fed will still hike by then, while expectations for more ECB QE could weigh on the euro.