Daily Insight
Group Economics Macro & Financial Markets Research
20 October 2016
ECB preview: What is priced in? Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
ECB preview: What has been priced in? - The ECB will convene for the first time today after ECB President Draghi asked committees to look at ways to safeguard a smooth execution of its QE programme. Although it remained unclear when the results of this study would be published, we expect this to occur at the December meeting. Such an announcement would then be combined with the publication of new forecasts on growth and inflation. The October meeting can therefore be seen as a prelude, but the market will still be keen to look for hints or clues. At today’s meeting, we think that Mr Draghi will keep policy rates unchanged, while leaving the door open for an extension of the QE programme and dismiss any taper speculation. It is very likely that Mr Draghi will refrain from commenting on possible changes to the self-imposed QE purchase rules. Market expectations, by looking at EONIA forward rates, are in line with policy rates being kept on hold for the remainder of the year. It is more difficult to deduce what the market is expecting with regards to an extension of the QE programme or on tweaks to the purchase rules. An extension would be mainly supportive for government bonds and would keep yields compressed. However, in recent weeks taper speculation as well as increased inflation expectations have pushed up bond yields. So, we see room for yields to drop again on dovish rhetoric. Overall, our base case scenario for the December meeting is an extension of the QE programme by six months and the removal of the deposit rate as floor for purchases. The latter means that the ECB will be able to buy short dated government bonds again. Recent movements in short dated bonds indicate that the market is indeed assigning a higher likelihood to a floor removal. Short dated asset swaps have widened and short dated bonds have performed compared to the overnight lending benchmark rate EONIA. But we think that the removal of the floor is not fully priced in yet, we therefore expect short dated Bund yields to decline further. (Kim Liu) Euro Macro and ECB: No underlying inflationary pressures Core inflation in the eurozone has been stuck at levels below 1% since March of this year. Services prices have a relatively large weight in eurozone core inflation. Large parts of the services sector are domestically orientated (e.g. public administration, real estate services, arts and entertainment, housing services and rents) implying that the prices of these services are largely determined by domestic economic developments. Services sector price inflation has been hovering at a level of around 1% since the start of 2014. In our note Euro Watch – No underlying inflationary pressures, we have looked at the reasons behind the low level of services sector price inflation and the outlook for the rest of this year and the next. We conclude that the delayed impact of the drop in oil prices in 2014-15 is depressing the inflation rate of transport services at the moment and that this effect will peter out during the next two years. Meanwhile, we expect the services sector to grow only modestly during the rest of this year and in 2017, while wage growth in the sector has slowed down recently and is expected to remain subdued. All in all, we expect no significant increase in underlying inflationary pressures in the eurozone. (Aline Schuiling) China Macro – Economic growth remains stable at 6.7% yoy in Q3. Real GDP growth was steady at 6.7% in Q3, similar to the levels seen in Q1 and Q2. Quarterly growth came in
Insights.abnamro.nl/en
Bloomberg: ABNM
2
Daily Insight - ECB preview: What is priced in? - 20 October 2016
at 1.8% qoq (Q2: 1.9%). The services sector remains the fastest growing sector (7.6% yoy), followed by industry (6.1%) and agriculture (3.5%). The latest activity data for September published on Wednesday also confirm the resilience of the Chinese economy. Growth of industrial production slowed to 6.1% yoy (August: 6.3%). However, retail sales accelerated further to 10.7% yoy (August: 10.6% yoy). Meanwhile, growth of fixed investment rose to 8.2% yoy (August: 8.1%), with private investment growth improving a bit but remaining relatively low. We expect China’s very gradual slowdown to continue, with real GDP growth falling from 6.9% in 2015 to around 6.7% in 2016 and around 6.0% in 2017. However, China’s macrofinancial risks (related to high debt, weak private investment, overcapacity, bank asset quality deterioration, capital account liberalisation) remain and need pro-active ‘short-term pain, long-term gain’ management to prevent accidents down the road. For more info, see our China Watch, Growth steady at 6.7% yoy in Q3,. (Arjen van Dijkhuizen)
DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in th e document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information con tained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO)
3
Daily Insight - ECB preview: What is priced in? - 20 October 2016