Global daily insight 26 october 2016

Daily Insight

Group Economics Macro & Financial Markets Research

26 October 2016

Will the ECB start tapering covered bond purchases?

CBPP3 tapering?

Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

CBPP3 tapering?

ECB Governing Council Member Ewald Nowotny has indicated that the CBPP3 programme has reached its limits. Reuters reported that he had said on Monday that it had become more difficult for the Eurosystem to purchase covered bonds. His statement mirrors the significant decline in the central bank’s covered bond purchases since the start of the summer. Indeed, weekly purchases have on average amounted to EUR 1bn since July, while this was EUR 1.7bn in the first half of the year. The decline mainly stems from a drop in purchases in the primary market, which merely reflects less new issuance from euro area issuers. Meanwhile, the purchases in the secondary market have dropped by some 25% compared to the first half of the year.

This leaves the question whether the Eurosystem has started tapering covered bond purchases. In our view , the jury is still out, although we think that the monthly amount of covered bond purchases will remain modest, at around EUR 4-5bn. If one defines tapering as a drop in the monthly amounts that the central bank is buying, this will indeed be the case. However, if one were to define tapering as an intended change in policy by the Eurosystem to reduce its covered bond purchases (as we do), tapering will probably only start once the central bank reduces its monthly target of total asset purchases from the current EUR 80bn now. Looking forward, it is our base scenario that the ECB will extend QE until September next year, so in that respect, tapering still seems a long way off. Please see a more detailed report here. (Joost Beaumont) Germany’s Ifo survey signals robust growth in the final quarter of the year Germany’s Ifo business climate indicator (covering the retail, wholesale, manufacturing and construction sectors) jumped higher in October. It rose to 110.5, up from 109.5 in September. The expectations component is the part of the survey with the closest link to GDP growth. It increased from 104.5 to 106.1, which signals that the German economy gathered momentum moving into the final quarter of this year, after it slowed down somewhat during the summer months. That said, the separately reported Ifo business climate indicator for the services sector was less buoyant, edging slightly lower in October, although remaining at still elevated levels.

Overall, the Ifo survey paints more or less the same picture as the PMI report that was published on Monday, which showed that the composite PMI jumped to 55.1, up from 52.8 in September. We expect the German economy to expand at a rate of around 0.3-0.4% qoq in both Q3 and Q4 of this year, which is similar to the pace of growth in Q2. However, the jumps in the Ifo and PMI suggest that the risks to our forecasts are tilted to the upside.

(Aline Schuiling)

Insights.abnamro.nl/en

Bloomberg: ABNM

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Daily Insight - Will the ECB start tapering covered bond purchases? - 26 October 2016

Euro to pare losses versus USD The EUR/USD has fallen by around 3% since the start of this month. It seems that the impact of the polls regarding the outcome of the US elections on EUR/USD has risen recently, with the dollar strengthening on the back of Clinton increasingly being the favourite to win the elections. In addition, the dollar has gained strength on rising expectations in financial markets that the Fed will hike rates this year. Currently, markets have priced in more than 70% chance of a rate hike in December. The divergence in monetary policy across the Atlantic has supported the US dollar versus the euro.

In addition, political uncertainty in Spain and the uncertainty about the rating outlook for Portugal also weighed on the euro at the start of the month. However, the tide has turned for the better, as Portugal kept its investment grade rating, while the political situation in Spain has improved. As a result, downward pressure on the euro has diminished. In the near-term we therefore expect EUR/USD to edge higher towards our year-end target of 1.10.

However, if incoming US data would surprise on the upside, this will likely foster Fed rate hike expectations for this year and next year, which should support the US dollar. EUR/USD could then move towards 1.05. At this level, we expect the downside potential in EUR/USD to be limited. (Georgette Boele))

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Daily Insight - Will the ECB start tapering covered bond purchases? - 26 October 2016