Daily Insight
Group Economics Macro & Financial Markets Research
23 August 2016
Janet…some clarity please? Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Central banks: Waiting for Yellen – The communication of FOMC policymakers in the past few days has left Fed watchers more confused about the monetary policy outlook. The more cautious FOMC members think that the structure of the US economy has changed and are suggesting that it’s time to consider a “rethink” of monetary policy. Their preference is to "wait and see". For instance, Fed President Williams had suggested that given slower trend productivity and economic growth that the natural rate of interest could be lower. Williams proposes that options should be examined for raising the inflation target above 2% or moving toward a new target pegged to nominal economic growth (though even more confusingly he subsequently has suggested a rate hike may be appropriate). Meanwhile, several policymakers, including Vice-chairman Fischer and New York Fed President Dudley, suggest that there is still a possibility of the Fed hiking rates soon. The debate on monetary policy will continue in Jackson Hole at the end of the week and Chair Janet Yellen’s speech will likely give some relevant insight on this topic. We continue to expect the Fed to keep rates on hold until early next year and to hike three times in total next year. We think that inflation remains too soft for a rate hike soon, while the US growth outlook and international developments are still uncertain. (Maritza Cabezas) Credits: ECB slows down corporate purchases due to holiday season - On Monday, the ECB gave an update on its weekly purchases under its corporate sector purchase programme. Last week, it bought EUR 1.6 bn of corporate bonds. That brings the total holdings to EUR 17.8 bn. During the holiday season, the pace of the purchases slowed down as market liquidity is low and flows are very light at best. We expect the purchases to pick up again to the normal pre-holiday pace of EUR 2 bn per week once the market comes to life again. Last week, the ECB also clarified why many bonds that are issued by eligible issuers, are ineligible. In its Q&A section it wrote that to be eligible, the documentation of the bond needs to satisfy specific requirements. We already highlighted this easily overlooked issue, in a note that we published last month. We calculated that it affects EUR 100bn worth of corporate bonds. The result is that some bonds are eligible and some bonds from the same issuing entity are ineligible due to the different documentation format used. Please see our recent note Euro Corporate Watch – Why EUR 100bn “eligible bonds” are not eligible” (for professional clients, please see disclaimers in the document) https://insights.abnamro.nl/en/2016/07/euro-corporate/. (Hyung-Ja de Zeeuw) Covered bonds: Market reopens with lowest 10y coupon - The primary covered bond market reopened after the summer break. WL Bank was the first bank to launch a euro benchmark covered bond, selling a 10y EUR 500 mn covered bond. The deal attracted solid demand, with 35 investors pacing EUR 730 mn of orders. This was despite the fact that the coupon was set at 0.1%, which was reported as the lowest ever on a 10y benchmark deal, reflecting the ultra-low/negative interest rate environment. Central banks bought roughly half of the deal, suggesting that the Eurosystem bought a large chunk. Commerzbank will on Tuesday follow in the footsteps of WL Bank, as it announced that it will come to the market with a ‘long’ 10y covered bond. It will be joined by Norwegian bank Sparebank 1 Boligkreditt, which will sell a 10y covered bond. This clearly shows that the primary covered bond market is open for business. (Joost Beaumont)
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Daily Insight - Janet…some clarity please? - 23 August 2016
Eurozone macro: Spain’s political deadlock not ended yet - Some progress has been made in ending Spain’s political stalemate. Acting prime minister Mariano Rajoy of the centre-right Partido Popular (PP - the biggest party with 137 of the total 350 seats in parliament) has been in discussion with his preferred coalition partner the centrist Ciudadanos (32 seats) about forming a coalition. The PP has agreed to six non-negotiable conditions that were put on the table by Cs, which are about fighting corruption and changing the political system. Still, some hurdles need to be taken and a third election cannot be excluded yet. A coalition of PP and Cs would not have a majority of the seats in parliament, implying that they need the support of some members of the Socialist Party (SP). On 30 August Mr Rajoy will face a parliamentary confidence vote. This will consist of two votes. In the first vote an absolute maj ority is needed, but in the second only a simple majority will suffice. This means that some members of the SP would need to abstain, allowing Mr Rajoy to win the vote and start forming a government. However, further negotiations are needed, as SP leader Pedro Sanchez has insisted that he will vote against Mr Rajoy. (Aline Schuiling)
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Daily Insight - Janet‌some clarity please? - 23 August 2016