Guest Post by Thomas Harjes and Fabio Fois (Barclays) | Despite the softer November inflation print and some likely downward revisions in the ECB’s inflation and growth outlook next week, we do not expect the ECB to announce further policy easing when the Governing Council meets on Thursday, 4 December. We believe the ECB is going to wait at least another month.
MADRID | The Corner | Markets are already discounting the ECB’s QE of sovereign debt. That is why the risk premiums of the European periphery are now at historical low levels –take the Spanish one, for instance, which has dropped to 108 points. The yield of the 10-year bond has fallen to 1.85%. In this context, a sovereign bond purchase program still makes sense. “The latest inflation data of the Eurozone, which are at 0.3%, are a clear indicator of that,” Felipe López-Gálvez, expert at Self Bank, explains. However, the program would not acquire a full meaning until the German economy showed signs of weakness. “If Germany holds on,” then the ECB will not come to that extreme.
MADRID | By JP Marín Arrese | The inability to implement a common economic stance aimed at delivering growth and jobs in Europe is putting the onus on monetary policy. The ECB stands as the only hope for redressing a dismal state of affairs. Yet, such high expectations could prove ill-founded. While Draghi saved the Euro’s plight back in mid-2012, he now seems utterly helpless to prevent deflationary bouts looming on the EZ horizon. His quantitative easing (QE) plan, far from achieving its goal, has lost steam. Many observers have put the blame on the ECB’s reluctance to enlarge the asset basket it is currently buying, demanding fully fledged QE, which involves junior debt and sovereigns. Yet, the flaw might lie in Europe’s failure to fully profit from monetary easing.
MADRID | The Corner | As expected, the ECB’s Governing Council left the policy rates and the ABSPP, CBPP3 and TLTRO programmes unchanged and expressed its endorsement for increasing the central bank’s balance sheet to its size at March 2012, that is, around €3Tr. Draghi explicitly pointed out that they would evaluate further measures in case that the current purchase programmes are not enough to expand the balance sheet or if the EZ inflation outlook worsens. With policy rates at the zero bound, pressure is mounting on the central bank to act.
WASHINGTON | Comment by UBS analysts | The FOMC ended QE and made its Fed funds rate hike guidance a bit more data- dependent. While the funds rate is likely to remain in its current range “for a considerable time” after asset purchases end at the end of this month, rate hikes could occur sooner or later than the Fed currently anticipates depending on the evolution of economic data. This was as straightforward an FOMC statement as could have been expected at the end of QE. It does not suggest changes in Fed thinking; nor does it change our expectations for the first Fed fund rate hike in mid-2015.
MADRID | The Corner | As expected, the Fed confirmed the end of its QE3, although the announcement was slightly more restrictive. According to experts at Link Securitites, “while the decision shows that US economic conditions have improved (especially the labour market) and inflation remains at low levels, the message tone was more hawkish.”
SAO PAULO | By Benjamin Cole via Historinhas | No, I do not have dense pages of calculus for the reader, purporting that QE would be ruin or divine salvation, or that minor deflation is the theoretical apex of an economic model.
MADRID | The Corner | The ECB disappointed all those who were keen to gain more concrete information on how it wants to expand its balance sheet over the coming months. Instead, Mr Draghi pointed out that inflation expectations, not balance sheet size, remain the ultimate yardstick of current and future ECB action. “We think this is the right communications strategy as we had become concerned that the ECB would set fairly explicit balance sheet targets that it might struggle to attain. The ECB offered a more cautious assessment of the growth and inflation outlook and left the door open for additional unconventional measures. Nevertheless, our base case scenario remains that sovereign QE will not be triggered,” UBS analysts commented.
MADRID | By Francisco López | The ECB’s measures since June have been oriented to fight the ghost of deflation, increasing the Eurozone’s economic activity and, in an indirect manner, managing the euro’s depreciation. For the moment Mr Draghi has failed in the first two goals, although he has succeeded in the third one. The euro is plummeting –which is good news.
SAO PAULO | Benjamin Cole via Marcus Nune’s Historinhas | Well, if a Martin Wolf can call for permanent QE by all Western governments, and if a John Cochrane can suggest the U.S. Federal Reserve should completely liquidate the U.S. national debt, than I guess my USE-ME program is worth trotting out as well. I mean anything goes these days, no?