Daily Insight
Group Economics Macro & Financial Markets Research
06 October 2016
Not the time for ECB taper US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
ECB view: Leaks raise prospect of taper, but not soon in our view – Leaks from unnamed ECB officials suggested that the central bank was making plans on how to end its QE programme. These stories weighed on European equities and bonds on Tuesday. According to Bloomberg ‘an informal consensus has built among policy makers in the past month that asset buying will have to be tapered once a decision is taken to end the program’. The reduction would take place in steps of EUR 10bn a month according to the report. However, we are not convinced that the story amounts to a taper anytime soon. To start with the story notes that officials ‘didn’t exclude that QE could still be extended past the current end-date of March 2017 at the full pace of EUR 80bn a month’. In addition, the ECB’s forward guidance on QE is that ‘it will continue until (we see) a sustained adjustment in the path of inflation consistent with its inflation aim’. In our view this means core inflation should show a clear upward trend. Yet with growth lacklustre, wages subdued, core import prices falling and inflation expectations dislodged, this does not look likely in the coming months. (Nick Kounis & Kim Liu) ECB outlook: Extension still expected in December - We therefore continue to think that the ECB will expand the duration of its QE programme from March 2017 currently to September 2017 in December. The momentum behind the eurozone recovery has slowed and the overall pace of economic growth remains too moderate to generate significant underlying inflationary pressures any time soon. As it signalled in September, the ECB will also likely announce changes to its QE programme to increase the universe of eligible assets as it will not be able to meet even its current targets under the existing structure. The ECB will likely decide to start buying bonds that yield less than the deposit rate (so far restricted) as well as buying bonds below the 2y maturity. We do think it is logical that when the ECB does decide to end the programme that it would do so gradually. This is also what the Federal Reserve did. So tapering would make perfect sense when the time is right. However, the time is not right now. (Nick Kounis & Kim Liu) US Macro: Service sector shows positive momentum - US data released Wednesday, showed that services remain the key driver of the economy. Indeed, the ADP jobs report showed that private employment increased by 154K down from 171K in August. Although this suggests some moderation in job gains, the industry snapshot continued to show that jobs in the service-providing sector was the main contributor to job growth (+151K), while there were less jobs in manufacturing (-6K). This report is an appetizer for Friday’s nonfarm payrolls data . We look for an increase of 160K jobs, while the unemployment rate is expected to remain unchanged at 4.9%. We expect job gains to moderate in the coming months. Meanwhile the services ISM continued expanding at the fastest pace in almost a year. September’s ISM non-manufacturing survey which is a gauge of service activity, increased to 57.1 from 51.4. Looking at the details of the survey, the new orders report, a forward looking metric, increased by 8.6 ppts to 60, while the employment component rose 6.5ppts to 57.2. Both the ADP report and the ISM non-manufacturing support a rate hike this year. The Federal funds futures increased suggesting that there is now a 62% chance of a
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Bloomberg: ABNM