Daily Insight ECB outlook: what’s priced in?
Group Economics Macro & Financial Markets Research
Nick Kounis, +31 20 343 5616
22 October 2015 • • •
We look at to what extent further ECB easing is priced in to markets as well as scenarios Markets are pricing in a 30% chance of a 10bp deposit rate cut by year end Meanwhile, a QE extension is more priced in than an increase in the pace of monthly purchases
Speculation has heated up, but what is priced in?
Probability of deposit rate cut
Over the last few months, speculation has increased that the ECB
%, derived from ECB-dated EONIA forwards
will take more action, over and above the asset purchases it has announced. Discussion has centered on some kind of adjustment of its QE programme and more recently on the possibility of a deposit rate cut. Below we will assess to what extent the different policy actions are priced in by financial markets, as well as what impact different scenarios will have. Our own base case, which we call QE Plus, is that the ECB will both step up and extend its QE programme at the December meeting.
70 60 50 40 30 20 10 0 Oct Dec Jan Mar Apr Jun 15 15 16 16 16 16
Deposit rate cut this year is only modestly priced in
10bp
Jul 16
Sep Oct Dec 16 16 16
20bp
The ECB’s deposit rate currently stands at -0.2%. It was reduced to this level from -0.1% in September of last year, while before that
Source: Bloomberg and ABN AMRO Group Economics
it was moved down from zero in June of last year. Assuming that the EONIA rate will remain around 5bp above the deposit rate, we can use EONIA forwards to calculate to what extent markets are pricing in a 10bp deposit rate cut and 20bp reduction (see chart). Markets are pricing in a 30% chance of a 10bp reduction by year end, rising to 60% by June of next year. The probability of a 10bp reduction today is seen at just 10%. QE extension more priced in than increase in monthly purchases Expectations of QE are not directly observable in market pricing, so what investors exactly expect is more uncertain. Certainly as QE speculation has built, we have seen Bund yields declining and
Scenario 1: ECB sits on its hands in 2015 If the ECB refrains from action this year, this would be disappointing to financial markets. It would be a negative for risky assets and spreads, and we would see upward pressure on core bond yields and curve (2s5s) steepening. The euro would be pushed up through 1.15. Scenario 2: ECB extends through September 2016 If the ECB announces that the asset purchase programme would likely run through September 2016, without any additional measures, this could be slightly disappointing to markets, with moderate reactions in the general direction described above.
yield curves flattening, a typical sign that investors are starting to build in expectations of more QE. The moves have not been big enough to suggest that QE is fully priced in, while we think speculation has been more focused on an extension of the duration of the programme than an increase in the size of monthly purchases. A recent Bloomberg survey seems to be in line with this. Of the 53 analysts surveyed, 81% expect the ECB to step up QE eventually (up from 68% last month). However, only 51% expect the move to come this year. Of those that expect more QE, 81% expect an extension of the programme past September 2016, while only 42% expect an increase in the size of monthly asset purchases. Only 4% expect a deposit rate cut.
Scenario 3: Monthly increase and extension of QE An increase in monthly purchases as well as an extension of QE would have a significant effect in supporting risky assets and sovereign yield spreads. Bund yields would fall further and we would see 2s5s flattening. The euro would be pushed down. Scenario 4: QE Plus and deposit rate cut An increase and extension of QE together with a deposit rate cut would have the most powerful effects, generally in the same direction but bigger in size than Scenario 3. The euro would be hit in particular by the rate cut. The exception would be somewhat less curve flattening as a rate cut would be supportive of 2y government bonds (German 2y yields could fall below -30bp).
2
ECB outlook: what’s priced in? – 22 October 2015
Financial markets Currency markets
Close
Change 1 day
Change 5 days
Change YTD
EUR/USD USD/JPY
1.1342
0.0265
-0.3864
119.89
-0.0334
0.8326
-6.2490 0.0918
AUD/USD
0.7213
0.0416
-1.5828
-11.7676
USD/CHF
0.9593
-0.0313
0.9152
-3.5201
NZD/USD
0.6722
0.2236
-1.8973
-13.7874 -0.9886
GBP/USD
1.5423
0.0389
-0.2329
USD/SGD
1.3950
0.0287
1.2263
5.2433
USD/CAD
1.3137
-0.0152
2.1222
13.0453
Bond markets
Close
Change 1 day
Change 5 days
Change YTD
2-year German Govt Bond yield
-0.2570
-0.0130
0.0030
10-year German Govt Bond yield
0.5680
-0.0580
0.0270
-0.1590 0.0270
Yield curve Germany
0.8250
-0.0450
0.0240
0.1860
2-year US Treasury Bond yield
0.6209
0.0000
0.0241
-0.0436
10-year US Treasury Bond yield
2.0228
0.0000
0.0053
-0.1484
Yield curve US
1.4019
0.0000
-0.0188
-0.1048
US 2-year sw ap rates
0.7373
0.0075
0.0296
-0.1570
US 10-year sw ap rates
1.9935
0.0029
0.0306
-0.2926
US sw ap curve
1.2562
-0.0046
0.0010
-0.1356
EU 2-year sw ap rates
0.0380
-0.0050
-0.0030
-0.1370
EU 10-year sw ap rates
0.9416
0.0006
-0.0054
0.1296
EU sw ap curve
0.9036
0.0056
-0.0024
0.2666
-0.0530
0.0000
-0.0040
-0.1310
0.3204
0.0038
-0.0001
0.0648
JPMorgan EMBI Plus Sovereign S
408.1100
7.6900
-5.4400
20.6700
Equity markets
Close
Euribor 3 Month ACT/360 ICE LIBOR USD 3 Month
Change 1 day % Change 5 days %Change YTD%
Nikkei 225
18,442
-0.60
1.91
5.68
Hang Seng Index
22,989
-0.37
1.72
-2.61
Hang Seng China Enterprises Index
-11.14
10,649
-0.37
2.03
Australian Stock Exchange S&P/ASX 200 Index
5,223
-0.49
-0.14
-3.48
Singapore Straits Times Index
3,026
0.22
1.40
-10.09
Euro Stoxx 50 Index
3,272
0.51
2.53
4.00
S&P 500 Index
2,019
-0.58
1.24
-1.94
MSCI World Daily Total Return Gross USD
760
-0.31
1.21
-0.96
AEX Index
450
0.56
3.56
5.96
17
6.03
-7.38
-13.02
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%
196
-0.93
-2.12
1,167
-0.02
-1.36
-14.93 -1.51
45
0.35
-2.20
-14.85
48
0.31
-1.46
-16.27
5,175
-0.50
-2.34
-17.86
496
0.25
-1.29
-15.90
3
ECB outlook: what’s priced in? – 22 October 2015
Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Monday Monday Monday Monday Monday Monday Monday Monday
19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015
04:00:00 04:00:00 04:00:00 04:00:00 04:30:00 09:00:00 15:45:00 16:00:00
CN CN CN CN CN CH EC US
GDP - % yoy Retail sales - % yoy Industrial production - % yoy Fixed asset investment - % yoy Bloomberg GDP Monthly Estimate - % yoy Total Sight Deposits bn ECB announces weekly QE details NAHB home builders' confidence index
Q3 Sep Sep Sep Sep
6.9 10.9 5.7 10.3 6.55
6.8 10.8 6.0 10.8
6.8
Oct
64.0
61.0
60.0
Tuesday Tuesday Tuesday
20/10/2015 20/10/2015 20/10/2015
06:30:00 14:00:00 14:30:00
NL HU US
Consumer confidence - index Base rate -% Housing starts - % mom
Oct Oct 20 Sep
5.0 1.35 -3.0
1.35 1.2
1.35 1.0
Wednesday Wednesday Wednesday Wednesday
21/10/2015 21/10/2015 21/10/2015 21/10/2015
01:50:00 13:00:00 16:00:00
JP TR CA BR
Merchandise trade exports - % yoy Repo rate - % Policy rate - % Policy rate - %
Sep Oct 21 Oct 21 Oct 21
0.6 7.5 0.5 14.25
7.5 0.5 14.25
7.5
Thursday Thursday Thursday Thursday Thursday Thursday Thursday
22/10/2015 22/10/2015 22/10/2015 22/10/2015 22/10/2015 22/10/2015 22/10/2015
08:45:00 10:30:00 13:45:00 13:45:00 15:00:00 16:00:00 16:00:00
FR GB EC EC US EC US
Business confidence manuf. - index Retail sales - % mom ECB refinancing rate - % ECB Deposit rate - % FHFA house price index - % mom Consumer confidence Existing home sales - % mom
Oct Sep Oct 22 Oct 22 Aug Oct Sep
104.0 0.2 0.05 -0.20 0.6 -7.10 -4.8
0.05 -0.20 0.5 -7.50 0.7
0.05 -0.20
Friday Friday Friday Friday Friday
23/10/2015 23/10/2015 23/10/2015 23/10/2015 23/10/2015
10:00:00 10:00:00 10:00:00 15:00:00 15:45:00
EC EC EC BE US
PMI manufacturing - index PMI services - index Composite PMI output Business confidence - index Markit - Flash PMI
Oct P Oct P Oct P Oct Oct P
52.0 53.7 53.6 0.0 53.1
51.8 53.2 53.5
51.5 53.5 53.3
-7.80 0.5
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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