Daily Insight
Group Economics Macro & Financial Markets Research
8 April 2016
ECB remains in easing mode Aline Schuiling Senior Economist Tel: +31 20 343 5606 aline.schuiling@nl.abnamro.com
Arjen van Dijkhuizen
•
The account of the ECB’s March meeting reveals a broad range of concerns …
•
… suggesting that further policy easing is on the cards
•
We expect further ECB stimulus to take the shape of more QE
•
China’s FX reserves up for the first time since October 2015
Senior Economist Tel: +31 20 628 8052 arjen.van.dijkhuizen @nl.abnamro.com
Account of ECB meeting signals worries about the economy … The account of the ECB’s March monetary policy meeting shows that there were was broad concern amongst the members of the Governing Council about the further deterioration in the global economic outlook since the January policy meeting, which had been ‘accompanied by bouts of market volatility, particularly in markets for bank liabilities’. … the de-anchoring of inflation expectations and the bank lending channel … With respect to inflation ‘the expected pick-up in HICP inflation had been delayed again, with the annual rate now reaching 1.6% only in 2018’. Meanwhile, the ‘downside risks to the medium-term price stability objective had clearly increased’, while the downward revisions to the outlook for inflation in 2016 and 2017 were due not only to ‘considerably lower oil prices and an appreciation of the effective exchange rate of the euro’, but also to domestic fundamentals such as ‘the weaker outlook for compensation per employee’. Finally, renewed concerns in financial markets about the health of the euro area banking sector was seen as a risk to the continued ‘smooth transmission to the real economy of the monetary policy measures taken since June 2014’. According to the Governing Council ‘the risk of an un-anchoring of inflation expectations continued to be a key concern’. … making a strong case for further policy easing and a rebalancing of instruments Overall, the Governing Council concluded that there was a strong case to reconsider its monetary policy stance and provide further ‘substantial monetary stimulus’. In a speech in Frankfurt on 7 April, the ECB’s Chief Economist Peter Praet explained the March set of policy instruments (a moderate cut in policy rates, expansion of the QE programme and a new cheap loan programme for banks) by saying that the central bank had ‘rebalanced its package across instruments, placing greater emphasis on the credit easing dimension by increasing the intensity of our asset purchases and strengthening the incentives
Insights.abnamro.nl/en
2
Daily Insight – ECB remains in easing mode – 8 April 2016
embedded in the TLTROs’. We think that further policy easing will continue to be in line with this policy mix. Increase and extension of QE Indeed, given our scenario for growth and inflation, we think that the ECB will probably ease policy further this year. Rather than rate cuts, we think further monetary easing will take the form of additional QE. We expect an increase in the monthly purchase total by another EUR 20bn taking it to EUR 100bn. In addition, we expect the end date to be extended to June 2017, from March 2017 currently. This will probably not be announced before September, given the ECB may want to first implement and see some early results from the measures it announced in March. A euro surge could still trigger another rate cut but not our base case Although we do not completely rule out further rate reductions, we think a sharp rise in the euro would be needed to trigger this. Such a scenario could occur due to Brexit (which would lead to a sterling slump) or due to additional dovish shifts in expectations about the Fed or BoJ.
China’s FX reserves are stabilising USD tn
USD bn
4
150 100
3 50 2
0 -50
1 -100 0
-150 08
09
10
11
12
Monthly change (rhs)
13
14
15
16
FX reserves, stock (lhs)
Source: Thomson Reuters Datastream
China’s FX reserves stabilise in March… After showing monthly declines for four consecutive months, China’s FX reserves edged up a bit in March, rising by USD 10.2 billion to USD 3.21 trillion. This outcome was better than expected, as the consensus expectation was for another drop of USD 6.3bn. The uptick in March followed a relatively shallow drop in February, contrasting sharply with the average monthly decline of USD 98bn seen in November 2015-January 2016. However, currency effects seem to have played a role as well. Bloomberg calculations show another decline of USD 20bn in March, if such valuation effects are discounted for. … suggesting that capital outflows have eased In any case, the stabilisation in China’s FX reserves in the past two months signals an easing of capital outflows. As we explained in our latest China Watch, 'Soft but bumpy landing to continue', this follows recent actions and statements by the PBoC aimed at stabilising the CNY versus the US dollar and curbing capital outflows. Of course, recent USD weakness – reflecting markets pricing out Fed rate hikes – and improving macro data for China are making the PBoC’s job a lot easier. We should add that the majority of
3
Daily Insight – ECB remains in easing mode – 8 April 2016
China’s capital outflows relate to entities repaying FX loans and/or hedging USD exposure and to the unwinding of carry trades. These kind of outflows are not really disruptive. However, it is too early to be complacent, as a renewed phase of dollar strength with rising exchange rate uncertainty could trigger another wave of capital outflows, while capital controls could prove less effective over the longer term. Such factors could weigh on FX reserves once again, although we expect the authorities to remain in control.
4
Daily Insight – ECB remains in easing mode – 8 April 2016
Day
Date
Time
Country
Monday Monday Monday
04/04/2016 04/04/2016 04/04/2016
10:30:00 15:30:00 16:00:00
EC US US
ECB's Praet speaks Fed's Rosengren speaks New durable goods orders - % mom
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
05/04/2016 05/04/2016 05/04/2016 05/04/2016 05/04/2016 05/04/2016 05/04/2016 05/04/2016 05/04/2016 05/04/2016 05/04/2016
01:00:00 07:00:00 08:00:00 10:00:00 10:00:00 10:30:00 11:00:00 14:30:00 16:00:00 16:00:00
IN US US DE EC EC GB EC US US US
Repo rate - % Fed's Kashkari holds Town Hall on Too Big to Fail Fed's Evans speaks on Economy and Policy Manufacturing orders - % mom PMI services - index Composite PMI output PMI services - index Retail sales - % mom Trade balance - USD bn ISM non-manufacturing, index US Job Openings by Industry
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
06/04/2016 06/04/2016 06/04/2016 06/04/2016 06/04/2016 06/04/2016
CN CN DE US US PL
PMI services - index PMI composite - index Industrial production - % mom Fed's Mester speaks Fed releases minutes from March 15-16 meeting Reference rate - %
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
07/04/2016 07/04/2016 07/04/2016 07/04/2016 07/04/2016 07/04/2016 07/04/2016 07/04/2016
CN NL US CH EC US US EC
Foreign reserves - USD bn CPI - % yoy Fed's Kaplan speaks Foreign currency reserves - CHF mln ECB's Constancio speaks at EU Parliament Committee Fed Reserve consumer credit - USD bn Fed's Yellen in NY with Greenspan, Bernanke, Volcker ECB's Draghi attends meeting of Portuguese President's Council
Friday Friday
08/04/2016 08/04/2016
US GB
Fed's George speaks Trade balance - GDP mln
03:45:00 03:45:00 08:00:00 18:20:00 20:00:00
02:00:00 09:00:00 09:00:00 21:00:00 23:30:00
02:15:00 10:30:00
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Feb F
-2.5
Apr 5
6.5
6.5
Feb Mar F Mar F Mar Feb Feb Mar Feb
-1.2 53.1 53.1 53.7 0.2 -47.1 54.5 5445.0
0.4 54.0 53.7 53.9 0.1 -46.0 54.2
-0.5
Mar Mar Feb
52.2 51.3 -0.5
-1.9
-2.5
Apr 6
1.5
1.5
1.5
Mar Mar
3212.6 0.6
3205.5
Mar Mar Feb
575.8b 17.2
14.9
-3459.0
-3633.3
ABN AMRO
-0.1
Mar
Feb
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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 the 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 contained 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").