Macro Weekly Group Economics Macro & Financial Markets Research ECB stimulus on the cards 31 August 2014 • ECB set to ease further: It seems very likely that the ECB will announce new action at Thursday’s meeting, or at the very least signal that such an announcement is just a matter of time. The big question is what the ECB will actually do. We think that a small asset purchase programme is the most likely option. This could be made up of purchases of asset backed securities in particular. However other types of securities, such as debt issued by supranational European institutions and corporate bond purchases could also be added. • Risks of large-scale QE have risen: Although we are not as gloomy as some on the eurozone economic outlook, the low levels of inflation do leave the region vulnerable to deflation in the case of a new economic shock. To manage these risks, it would be a good idea to put in place significant monetary stimulus. Indeed, as we have argued previously, this would have been an even better idea some time ago. Still, there remain doubts about whether the ECB will buy government bonds. • Downward revisions to long rates and euro: We have significantly revised down our forecasts for government bond yields. We now expect German Bund yields to roughly move sideways at these levels over the next six months. Our 3-month forecast has been reduced to 1% from 1.3% previously, while in the very near term, continued rates below 1% look likely. We have made more modest adjustments to our EUR/USD forecasts in the same vain. We see the currency at 1.28 at year-end (previously 1.30). Main economic/financial forecasts GDP grow th (%) 2012 2013 2014e 2015e +3M +12M 2014e 2015e 2.3 2.2 2.2 3.8 United States 0.23 0.23 0.3 1.3 0.3 1.7 -0.6 -0.4 0.9 1.7 Eurozone 0.19 0.17 0.2 0.1 0.2 0.1 Japan 1.5 1.5 1.5 1.4 Japan 0.21 0.21 0.2 0.2 0.2 0.2 United Kingdom 0.3 1.7 3.0 2.8 United Kingdom 0.56 0.56 1.0 1.8 1.0 2.2 China 7.7 7.7 7.5 7.0 World Inflation (%) 3.0 2012 2.9 2013 3.2 2014e 3.8 2015e 21/08/2014 28/08/2014 +3M +12M 2014e 2015e United States 2.1 1.5 2.0 2.2 US Treasury 2.41 2.34 2.6 3.1 2.6 3.3 Eurozone 2.5 1.3 0.5 1.0 German Bund 1.00 0.89 1.0 1.4 1.0 1.6 Japan 0.0 0.3 2.5 1.7 Euro sw ap rate 1.20 1.07 1.2 1.6 1.2 1.8 United Kingdom 2.8 2.6 1.6 1.7 Japanese gov. bonds 0.54 0.49 0.5 1.0 0.5 1.1 China 2.7 2.6 2.3 2.8 UK gilts 2.40 2.37 2.6 3.0 2.6 3.2 World Key policy rate 3.9 28/08/2014 3.8 +3M 3.9 2014e 3.7 2015e 21/08/2014 28/08/2014 +3M +12M 2014e 2015e Federal Reserve 0.25 0.25 0.25 1.50 EUR/USD 1.33 1.32 1.28 1.20 1.28 1.20 European Central Bank 0.15 0.15 0.15 0.15 USD/JPY 103.8 103.7 110 117 110 120 Bank of Japan 0.10 0.10 0.10 0.10 GBP/USD 1.66 1.66 1.62 1.56 1.62 1.60 Bank of England 0.50 0.50 0.75 2.00 EUR/GBP 0.80 0.79 0.79 0.77 0.79 0.75 People's Bank of China 6.00 6.00 6.00 6.00 USD/CNY 6.15 6.14 6.10 6.20 6.10 6.20 United States Eurozone Source: Thomson Reuters Datastream, ABN AMRO Group Economics. 3M interbank rate 10Y interest rate Currencies 21/08/2014 28/08/2014 2 Macro Weekly - ECB stimulus on the cards - 31 August 2014 Nick Kounis, tel. +31 20 343 5616 The Big Picture It’s a question of credibility… Following ECB President Mario Draghi’s comments at Jackson Debt securities outstanding in the eurozone Hole, additional monetary stimulus from the ECB looks very likely. Credibility is the holy grail for central bankers. Crucial to their success is that households, companies and investors believe that the central bank is willing and able to keep inflation roughly in line with its inflation goal in the years to come. If people start expecting them to miss their goal, this starts to be reflected in their price and wage setting behaviour, and it becomes a self-fulfilling prophesy. Following each and every meeting, Mr. Draghi and his predecessors have EUR bn 8000 7000 6000 5000 4000 3000 2000 1000 0 Government announced that inflation expectations were ‘firmly anchored’, MFIs Other Corporates financial inst. which essentially means ‘what we are doing is still credible…no reason to panic’. At Jackson Hole, Mr. Draghi Source: ECB made a significant shift, admitting that ‘over the month of August financial markets have indicated that inflation expectations exhibited significant declines at all horizons’. A rough translation is ‘we are losing our credibility…we need to do something!’ Indeed, maybe this was as much a call to arms of his fellow Governing Council members as the global policymakers and academics gathered in Kansas. For real scale, central government bond purchases need to be included, because at almost EUR 7 trillion, it is the only market that is liquid enough to allow for a large programme and hence ‘real QE’. For instance, using the Fed’s second QE programme as a benchmark, a sizeable programme for the eurozone should be in the region of EUR 400bn to begin with. The ECB could make up this total by buying government bonds as well Action is very likely…but what? So it seems very likely that the ECB will announce new action at Thursday’s meeting, or at the very least signal that such an announcement is just a matter of time. The big question is what the ECB will actually do. In our new Euro Rates Weekly, we look at a number of possible scenarios. We think that a small asset purchase programme is the most likely option. This could be made up of purchases of asset backed securities (ABS) in particular. However other types of securities, such as debt issued by supranational European institutions (such as the bail-out funds and the EU) and corporate bond purchases could also be added to give the programme a bit more scale. The ECB has often emphasised that the eurozone’s bank – rather than market – based economy should be taken into account in designing monetary stimulus policies. In this sense, an ABS purchase programme hits the spot. To the extent that a revival of the ABS market could provide banks with a new as ABS and some other assets. Although we are not as gloomy as some on the eurozone economic outlook, the low levels of inflation do leave the region vulnerable to deflation in the case of a new economic shock. To manage these risks, it would be a good idea to put in place significant monetary stimulus. Indeed, as we have argued previously, this would have been an even better idea some time ago. However, we have doubts about whether the ECB will buy government bonds at the current juncture. Although buying government bonds in the secondary market is perfectly legal, some Governing Council members have been reluctant in the past. In addition, the ECB may well argue that the combination of a small asset purchase programme together with the TLTROs (which it argues could be as large as a trillion euros) could give its monetary policy the necessary bite. Overall then, we think a small programme is most likely in the near term, but the chances of QE have certainly increased. option for funding and potentially help them to remove some assets from their balance sheets, it could give banks more space to lend. The main disadvantage of an ABS programme is its scale. A scheme focused solely on ABS would total around EUR 50 – 100bn. Even if the other assets are added, it is unlikely to be much bigger than EUR 200bn because these markets are relatively small. Even Super Mario is not omnipotent The danger is that the ECB is being asked to shoulder the economic and financial hopes of the whole region, with other policymakers not doing their share of the heavy lifting. Super Mario has had to save the euro, sort out the banking system and now single-handedly try to foster a stronger economic 3 Macro Weekly - ECB stimulus on the cards - 31 August 2014 recovery. As argued above, the eurozone could benefit from recovery. Housing demand is being supported by an improving yet looser monetary policy, not least to get the euro to labour market and low mortgage rates. depreciate more significantly against other currencies. That will help to lift exports as well as inflation, which is the central Soft eurozone numbers bank’s main responsibility. However, monetary stimulus is not Unfortunately another familiar theme was weakness in the the source of long term prosperity. Structural reforms are eurozone data. The European Commission’s sentiment crucial in the long term. It would be great to see a Super indicator fell by more than expected in August. It has been on François or a Super Matteo flying to the rescue over the a gradual downward trend over the last few months, however coming months, with some ground-breaking economic policies. the level is decent from a historical perspective, as it is above But let’s not get too carried away. the long-run average of the series. Indeed, it remains consistent with moderate economic growth. The country Even lower rates, and a weaker euro breakdown revealed particular weakness in Italy and France, Government bond yields have slumped to a succession of which has also been a feature of recent data and emphasised record lows over recent weeks. This reflects worries about the that these large eurozone economies are in particular need economic outlook, falling expectations for inflation and supply-side reforms. We remain of the view that the eurozone expectations of further monetary policy easing. As explained economy will return to growth in the second half of the year below, we do expect a moderate recovery to resume over the following the stagnation in the second quarter. Although our coming months, while inflation should creep up slowly next eurozone GDP forecast this year was recently revised down year. However the ECB is likely to take further action, and the (to 0.9% from 1.3%) that reflected the weak second quarter. A chances that it will do more will remain high for a time. Against stronger global economy, weaker euro, easier bank lending this background, we have significantly revised down our conditions, ECB stimulus and lower food and energy prices are forecasts for government bond yields. We now expect German factors pointing to moderate recovery. Bund yields to roughly move sideways at these levels over the next six months. Our 3-month forecast has been reduced to Further fall in eurozone inflation, but higher core 1% from 1.3% previously, while in the very near term, The declines in food and energy prices were visible in continued rates below 1% look likely. Later next year, we eurozone inflation in August. Due to a fall in energy prices in expect a modest rise in yields as the economic recovery has a particular, headline inflation fell to 0.3% yoy from 0.4%. The somewhat firmer footing. In addition, bond yields tend to move core measure of inflation, which is a better indicator of down on expectations of stimulus, but often move higher once underlying trends, rose to 0.9% yoy from 0.8% yoy, and it has the policy is actually in place. We have made more modest been on a sideways trend over recent months. This is of adjustments to our EUR/USD forecasts in the same vain. We course still nowhere near the ECB’s price stability goal, but it see the currency at 1.28 at year-end (previously 1.30). Our does provide some reassurance that we are set for ‘lowflation’ forecast for the end of next year remains unchanged at 1.20. in coming years rather than deflation. Strong US data Eurozone inflation Turning to recent economic data, most reports underlined % yoy familiar themes. For instance, US economic data were 4 generally strong. GDP growth in the second quarter was revised up to 4.2% from 4%. In addition, the quality of growth was better, as more of it came from business investment and 3 2 less of it from volatile inventories than earlier estimated. Most reports also suggest that the economy has since sustained above-trend growth rates. For instance, consumer confidence 1 0 rose to an almost seven year high in August. Durable goods orders saw their biggest gain on record in July. Although this was largely down to volatile aircraft orders, the data were -1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Total Core rate ECB target positive underlying terms as well. For instance, core capital goods orders rose by 1.5% after a 0.9% increase in June, signaling robust capital spending by companies. Housing data were a bit more mixed, but remained consistent with a gradual Source: Thomson Reuters Datastream 4 Macro Weekly - ECB stimulus on the cards - 31 August 2014 WEEKLY ECONOMIC CALENDAR Day Date Time Country Monday Monday Monday Monday Monday Monday 01/09/2014 01/09/2014 01/09/2014 01/09/2014 01/09/2014 01/09/2014 01:50:00 03:00:00 03:45:00 08:00:00 10:00:00 10:30:00 JP CN CN DE EC GB Tuesday Tuesday Tuesday Tuesday Tuesday 02/09/2014 02/09/2014 02/09/2014 02/09/2014 02/09/2014 06:30:00 07:45:00 15:45:00 16:00:00 16:00:00 Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday 03/09/2014 03/09/2014 03/09/2014 03/09/2014 03/09/2014 03/09/2014 03/09/2014 03/09/2014 03/09/2014 03/09/2014 Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Friday Friday Friday Friday Friday Friday Key Economic Indicators and Events Period Latest outcome Consensus Capital investment excl software - % yoy PMI manufacturing - index (official) PMI manufacturing - index (HSBC) GDP, 2nd estimate and details - % qoq PMI manufacturing - index PMI manufacturing - index 2Q Aug Aug F 2Q F Aug F Aug 8.3 51.7 50.3 -0.2 50.8 55.4 -0.6 51.2 50.3 -0.2 50.8 55.1 AU CH US US US Policy rate - % GDP - % qoq Markit - Flash PMI - final Construction spending - % mom ISM manufacturing - index Sep 2 2Q Aug F Jul Aug 2.5 0.5 58.0 -1.8 57.1 2.5 0.5 03:00:00 03:30:00 03:45:00 10:00:00 10:00:00 10:30:00 11:00:00 11:00:00 16:00:00 CN AU CN EC EC GB EC EC CA BR PMI services - index (official) GDP - % qoq PMI services - index (HSBC) Composite PMI output PMI services - index PMI services - index GDP, 2nd estimate and details - % qoq Retail sales - % mom Policy rate - % Policy rate - % Aug 2Q Aug Aug F Aug F Aug 2Q P Jul Sep 3 Sep 3 54.2 1.1 50.0 52.8 53.5 59.1 0.0 0.4 1.0 11.0 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 04/09/2014 08:00:00 09:30:00 09:30:00 13:00:00 13:00:00 13:45:00 13:45:00 14:15:00 14:30:00 14:30:00 14:30:00 16:00:00 DE NL SE GB GB EC EC US US US US US Manufacturing orders - % mom CPI - % yoy Policy rate - % BoE size of asset purchase programme - GBP bn Policy rate - % ECB Deposit rate - % Policy rate - % ADP nat. employment report - thousands Initial jobless claims - thousands Trade balance - USD bn Output per hour nonfarm business sector - % qoq ISM non-m anufacturing, index Jul Aug Sep 4 Sep Sep 4 Sep 4 Sep 4 Aug Aug 30 Jul 2Q F Aug -3.2 0.9 0.3 375 0.5 -0.1 0.15 218.1 298.0 -41.5 2.5 58.7 05/09/2014 05/09/2014 05/09/2014 05/09/2014 05/09/2014 05/09/2014 08:00:00 09:00:00 14:30:00 14:30:00 14:30:00 16:00:00 DE CH US US US MX Industrial production - % mom Foreign currency reserves - CHF mln Change in employment private employment - thousands Change in employment total - thousands Unemployment - % Policy rate - % Jul Aug Aug Aug Aug Sep 5 0.3 453391.0 198.0 209.0 6.2 3.0 1.0 56.7 ABN AMRO 2.5 57.5 0.3 52.8 53.5 58.4 0.0 -0.2 1.0 11.0 1.0 1.3 0.3 375 0.5 -0.1 0.15 214.9 0.9 0.3 375 0.5 -0.1 0.15 250 -42.6 2.5 57.4 58.0 0.4 0.6 207.0 218.7 6.1 3.0 250 250 6.1 Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events) If you would like to receive this calendar by email on Friday, please send a message to [email protected] Find out more about Group Economics at: https://insights.abnamro.nl/en This document has been prepared by ABN AMRO. 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