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
2
ECB frontloading QE – 20 May 2015
Financial markets Currency markets
Close
Change 1 day
Change 5 days
Change YTD
EUR/USD USD/JPY
1.1309
-0.0530
0.8561
119.95
-0.0333
0.0667
0.1419
AUD/USD
0.7997
0.0751
0.2633
-2.1774
USD/CHF
0.9262
-0.0108
-0.3229
-6.8490
NZD/USD
0.7435
0.6225
0.9779
-4.6428
GBP/USD
1.5656
0.0192
-0.0957
0.5072
USD/SGD
1.3279
-0.0602
-0.5169
0.1811
USD/CAD
Bond markets
1.2138
Close
-0.1809
Change 1 day
0.9901
Change 5 days
-6.5217
4.4488
Change YTD
2-year German Govt Bond yield
-0.1930
0.0020
0.0050
10-year German Govt Bond yield
0.6510
0.0020
-0.0240
-0.0950 0.1100
Yield curve Germany
0.8440
0.0000
-0.0290
0.2050
2-year US Treasury Bond yield
0.5727
-0.0040
-0.0234
-0.0918
10-year US Treasury Bond yield
2.2214
-0.0123
-0.0275
0.0502
Yield curve US
1.6487
-0.0083
-0.0041
0.1420
US 2-year sw ap rates
0.8329
0.0097
-0.0409
-0.0614
US 10-year sw ap rates
2.2797
0.0067
-0.0409
-0.0064
US sw ap curve
1.4468
-0.0030
0.0000
0.0550
EU 2-year sw ap rates
0.1130
-0.0015
0.0000
-0.0620
EU 10-year sw ap rates
0.9380
-0.0130
-0.0170
0.1260
EU sw ap curve
0.8250
-0.0115
-0.0170
0.1880
-0.0110
-0.0010
-0.0020
-0.0890
0.2765
0.0005
-0.0034
0.0209
JPMorgan EMBI Plus Sovereign S
362.9500
-8.3600
4.2800
-24.4900
Equity markets
Close
Euribor 3 Month ACT/360 ICE LIBOR USD 3 Month
Change 1 day % Change 5 days %Change YTD%
Nikkei 225
20,048
0.79
2.16
14.88
Hang Seng Index
27,659
0.25
0.92
17.17
Hang Seng China Enterprises Index
14,148
1.59
1.25
18.05
Australian Stock Exchange S&P/ASX 200 Index
5,616
-0.76
-1.04
3.79
Singapore Straits Times Index
3,450
-0.26
0.24
2.53
Euro Stoxx 50 Index
3,589
0.45
-0.97
14.07
S&P 500 Index
2,129
0.30
1.13
3.41
MSCI World Daily Total Return Gross USD
823
0.08
1.14
7.26
AEX Index
490
-0.16
-0.53
15.47
13
2.83
-8.09
-33.70
Chicago Board Options Exchange Volatility Index
Commodity markets Reuters/Jefferies CRB Total Return Gold spot USD/Oz Generic first NYMEX Crude Light future Generic first Brent Crude Oil future LME Copper 3 Months Rolling Forw ard Generic first Wheat future Chicago Board of Trade Source: Bloomberg
Close
Change 1 day % Change 5 days %Change YTD%
231
-0.34
1.06
1,223
-0.23
2.41
0.32 3.19
60
0.15
-2.02
11.73
66
-0.14
-1.02
15.44
6,380
-0.55
0.24
1.27
522
0.00
8.87
-11.53
3
ECB frontloading QE – 20 May 2015
Day
Date
Time
Country
Monday Monday Monday
18/05/2015 18/05/2015 18/05/2015
01:50:00 06:30:00 16:00:00
JP JP US
Tuesday Tuesday Tuesday Tuesday Tuesday
19/05/2015 19/05/2015 19/05/2015 19/05/2015 19/05/2015
10:30:00 11:00:00 11:00:00 11:00:00 14:30:00
Wednesday Wednesday Wednesday
20/05/2015 20/05/2015 20/05/2015
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015
Friday Friday Friday Friday Friday Friday Friday Friday Friday
Period
Latest outcome
Machinery orders private sector - % mom Industrial production - % mom NAHB home builders' confidence index
Mar Mar F May
2.9 -0.8 54.0
GB EC EC DE US
CPI - % yoy Core inflation - % yoy Trade balance external EU - EUR bn ZEW index (expectation economic growth) Housing starts - % mom
Apr Apr F Mar May Apr
-0.1 0.6 23.4b 41.9 1135.0
01:50:00 13:00:00 20:00:00
JP TR US
GDP - % qoq Repo rate - % Federal Reserve releases Minutes April FOMC meeting
1Q P May 20
0.6 7.5
03:45:00 09:30:00 10:00:00 10:00:00 10:00:00 10:00:00 10:30:00 16:00:00 16:00:00
CN NL EC EC EC EC GB US US
PMI manufacturing - index (HSBC) - flash Unemployment rate PMI manufacturing - index PMI services - index Composite PMI output BOP Current account - EUR bn Retail sales - % mom Philadelphia Fed - business confidence - index Existing home sales - % mom
May P Apr May P May P May P Mar Apr May Apr
48.9 7.0 52 54.1 53.9 13.8 -0.5 7.5 6.1
FR NL DE US US US US US JP
Business confidence manuf. - index Consumer confidence - index Ifo - business climate - index Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy Markit - Flash PMI Policy rate - %
May May May Apr Apr Apr Apr May P May 22
101.0 0 108.6 0.2 1.8 0.2 -0.1 54.1 80.0
22/05/2015 08:45:00 22/05/2015 09:30:00 22/05/2015 10:00:00 22/05/2015 14:30:00 22/05/2015 14:30:00 22/05/2015 14:30:00 22/05/2015 14:30:00 22/05/2015 15:45:00 22/05/2015 Field Not Appl
Key Economic Indicators and Events
Consensus
ABN AMRO
0.4
7.0
2 0.1 1.7 0.2 0.0 0.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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