Daily Insight ECB frontloading QE
Group Economics Macro & Financial Markets Research Nick Kounis & Aline Schuiling + 31 20 343 5616
20 May 2015
ECB’s Coeure says ECB will frontload QE, sending bond yields and the euro lower… …trend should continue in coming months but likely to reverse at turn of the year ZEW declines but remains at high level consistent with robust growth
ECB frontloading QE ahead of the summer
addition, the euro weakened significantly, with EUR/USD
ECB Executive Board member Benoit Coeure announced in a
dropping below 1.12. The continuation of QE should see core
speech that the ECB would frontload asset purchases in May
bond yields falling back further over the next few months.
and June ahead of the summer lull, when new issuance will
Against the background of weak supply and ongoing ECB
dry up and activity eases due to holidays. Indeed, he said that
purchases, we think that we will see a scarcity of AAA
the frontloading reflected ‘seasonal patterns in fixed-income
government bonds that will keep bond prices inflated
market activity with the traditional holiday period from mid-July
compared to fundamentals. Our 3m forecast for 10y Bund
to August characterized by notably lower market liquidity’. In
yields is 0.3%. In addition, QE should support risk spread
addition, he added that if ‘need be, the frontloading may be
compression and further euro weakness.
complemented by some backloading in September when market liquidity is expected to improve again’. Weekly data
Rebound in 2016 as QExit comes into view
suggests that the ECB has already started to pick up the pace
Having said that, an eventual large upward adjustment in core
of purchases.
government bond yields is just a matter of time. We think that this will take place at the turn of the year when the end of QE
Frontloading makes sense
or the QExit really comes into view. It seems unlikely to us that
The frontloading policy of the ECB makes sense. Net supply of
the ECB will continue QE beyond September of next year, and
government bonds jumped in May after being weak in the first
tapering could even come earlier in that year as growth and
few months of the year. For instance, net supply of German
inflation rise. Core government bond yields and the euro will
government bonds was negative in January-April, but became
likely rebound next year, though risk spreads should be more
significantly positive in May. It will become negative again over
resilient.
the Summer, when activity is generally low. In any case, May is one of the few months of the year where scarcity of core
Germany's ZEW falls - still stronger growth expected
government bonds has eased. The general pattern from most
Germany’s ZEW economic sentiment indicator fell from 53.3 in
months is scarcity of government bonds given weak net supply
April to 41.9 in May, which was lower than the consensus
and large ECB purchases.
forecast. ZEW sentiment is largely influenced by sentiment on financial markets, and the decline is probably related to worries
Mr. Coeure also addressed the issue of the sell-off in
about Greece and the rise in bond yields during the past few
government bonds over the last few weeks, stressing that the
weeks. Still, at its current level sentiment has remained well
frontloading was not a reaction to the sell-off. He said that the
above the long-term average value of around 25 and
rise in itself was ‘no cause for concern’, but suggested that the
consistent with robust growth in the coming quarters. Indeed,
speed of the rise was. He attributed the rise partly due to the
we expect GDP growth in Germany to increase going forward,
fact that ‘some of the more pessimistic assumptions of future
following the slowdown in Q1. The economy should benefit
growth and inflation trends are being revised’. However, the
from the weak euro and improved financial conditions due to
extreme volatility was due to ‘reduced liquidity.’
the ECB’s QE programme. Moreover, domestic economic fundamentals are strong, employment is growing, real wage
Coeure remarks lead to drop in yields and euro – trend
growth has jumped higher and corporate profitability has
should continue
improved as well. Therefore, we expect a broad-based
The remarks led to a strong rally in eurozone government
improvement in GDP growth during the rest of this year.
bonds. Core bond yields dropped by 7-9bp, while peripheral bond yields were generally down by around 12bp. Though a significant part of the move reversed later in the day. In