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"ECB Or Not To Be": Here's What Mario Draghi May Say Tomorrow

Looking at tomorrow's main event, the much anticipated ECB announcement in which Draghi may (or may not) announce a hawkish shift to the cental bank's policies and/or reveal the bank's tapering plans, Citi (whose titled we borrowed) gives the 30 second summary, and says that the market seems quite split on whether the ECB will remove the asset purchase program easing bias, but thinks that there’s room for mild disappointment. After all, it says, this meeting is just a warm up for the September meeting (and Jackson Hole). CitiFX Strategist Josh O’Byrne points out that the biggest market fear at the moment appears to be long positioning and "this risks morphing into FOMO for the next leg higher." For the press conference, Citi expects Draghi to slightly tweak some of the language from Sintra to lean a little bit more towards the dovish side.

The bank's expectations are summarized in the following handy cheat sheet:

From UBS, here is a big picture menu of ECB policy choices for normalization:

Another snap preview comes courtesy of SocGen which says that questions on possible exit scenarios should dominate the press conference.

While acknowledging the strength of the economy, Draghi is likely to counter any ideas of an imminent and rapid path towards ending QE, instead urging patience with the still-subdued inflation outlook. We maintain our call for an announcement in September of a six-month extension of the APP into 2018 at €40bn/month, followed by data-dependent quarterly reductions. Meanwhile, we expect the euro area consumer confidence indicator to stabilise as historically high levels (SGe 1.3%) in July. Elsewhere, in the UK, we look for only a modest bounce in retail sales in June.

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With the intros out of the way, Below is an extensive preview of what to expect, courtesy of RanSquawk

ECB Preview: Rate Decision due at 1245BST/0645CDT and Press Conference at 1330BST/0730CDT

  • All rates and the current pace of asset purchases are expected to be left unchanged.
  • There is a slight chance the ECB may adjust guidance on asset purchases following recent source reports.
  • Draghi may reiterate his most recent comments made at the Sintra Forum in his press conference.

RATE/ASSET PURCHASE EXPECTATIONS

  • DEPOSIT RATE: Forecast to remain unchanged at -0.40%. The rate was last adjusted in March 2016, when it was cut by 10bps.
  • REFI RATE: Forecast to remain unchanged at 0.00%. The rate was last adjusted in March 2016, when it was cut by 5bps.
  • MARGINAL RATE: Forecast to remain unchanged at 0.25%. The rate was last adjusted in March 2016, when it was cut by 5bps.
  • ASSET PURCHASES: Forecast to maintain the pace of asset purchases at EUR 60bln per month until December 2017. Last December, the ECB reduced the size of purchases by EUR 20bln per month, and extended the purchase horizon by nine months.

CURRENT ECB FORWARD GUIDANCE

  • RATES: “The Governing Council stated that the key ECB interest rates are to remain at present levels for an extended period of time, and well past the horizon of the net asset purchases.” (ECB statement, 8/Jun)
  • ASSET PURCHASES: “Net asset purchases, at the monthly pace of EUR 60bln, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” (ECB statement, 8/Jun)
  • GROWTH: “Risks to the growth outlook are now broadly balanced” (ECB statement, 8/Jun)
  • INFLATION: “Headline inflation has been recovering from the very low levels seen in 2016… Measures of underlying inflation remain low and are expected to rise only gradually over the medium term, supported by our monetary policy measures, the expected continuing economic recovery and the corresponding gradual absorption of slack.” (ECB statement, 27/Apr). Draghi (27/ Jun): “the threat of deflation is gone and reflationary forces are at play”.

AREAS OF DISCUSSION

ASSET PURCHASES: Speculation has been rife that the central bank will tweak its forward guidance with regards to its asset purchases. Citing sources, Reuters reported that the ECB may only drop part of its easing bias, leaving the reference to either the size or duration of QE in place.

Separately, sources cited by Bloomberg have reportedly said that the ECB is drawing up plans to wind down QE, and policymakers will consider these proposals in the autumn, hinting at a September announcement. 

Analysts at Bank of America Merrill Lynch look for the ECB to tweak its language: “We expect the ECB this week to toughen their language marginally, by removing the easing bias on QE, while insisting on the need for prudence and a persistent monetary stimulus,” BAML writes, “Sintra was not just about sending a hawkish message, it was also about expressing a healthy degree of unease at the pace of inflation normalisation and hinting that the end of QE did not mean fast normalisation in policy rates.”

INFLATION: It is likely that Draghi will cite weak inflation pressures within the Euro area in his Q&A. The ECB President has argued that loose policy is still warranted to ensure that inflation dynamics become durable and self-sustaining.

And inflation is still too low for the ECB’s comfort, Oxford Economics says, writing that a stronger euro and lower oil prices are negative developments for the euro area inflation profile.

“Although the ECB has raised its growth forecasts since the end of 2016, it has not increased its core CPI inflation forecast,” OxEco points out, “encouragingly, core inflation increased to 1.1% in June, the highest rate since 2013.”

"While Draghi noted at Sintra that the core inflation measure may understate underlying inflation, it is worth noting that a headline inflation overshoot over the next year and a half is unlikely due to the weak outlook for energy and food inflation."

EUR: Within the press conference there could also be talk about the EUR’s recent rally since the June meeting; the EUR now trades well above the central bank’s 1.08 assumption used in its June economic projections, and has risen approximately 2% on a trade weighted basis since June.

Analysts at Goldman Sachs note that the appreciation in the currency would be less welcome at the ECB since it could weigh on inflation pressures, especially so given the weakness in crude prices. “We do not think that Draghi would want to encourage further near-term currency appreciation and/or higher long-term rates,” Goldman says, “yet we do not expect Draghi to try to unwind the market re-pricing since the Sintra speech.”

As such, Draghi may proceed with caution, emphasising that any normalisation would likely be a gradual process, and this may be enough to put a lid on further EUR appreciation, some argue.

MARKET REACTION

In terms of the rate decision itself, little market reaction is expected, so focus will be placed onto the statement from the ECB. President Draghi is largely expected to reiterate his recent comments made at the Sintra conference last month, consequently gearing up for a policy reassessment in September with the ECB Council likely to temper some of the hawkish expectations over immediate policy tightening.

Some analysts suggest that EUR might be met with some downward pressure if the central bank doesn’t give too much away, leading to EUR to pare some of its recent rally observed over the past couple of weeks.

Additionally, there is a speculation following sources reports that the ECB might drop part of its bias over the size or duration of QE, and in doing so, this could potentially lead to upside in EUR and bond yields.

RECENT COMMENTARY

ECB SOURCES:

  • ECB drawing up stimulus plans for policymakers to consider when they return after the August break --Bloomberg (18/Jul)
  • ECB wary of putting end-date on QE, likely to seek flexibility in eventual cuts to programme --Rtrs (14/Jul)
  • ECB to announce winding down of bond purchases in Sept --WSJ (13/Jul)
  • Some ECB policymakers spooked by market turbulence, some cautious about lifting QE easing bias in July, ECB might only drop part of bias leaving reference to either size or duration of QE --Rtrs (3/Jul)
  • Markets did not take note of the caveats in Draghi's Sintra speech, comments intended to prepare market for decision on stimulus later this year without making commitment, ECB can be patient with inflation, can live with it taking longer to rise to targets --Rtrs (28/Jun)

INFLATION:

  • ECB’s Villeroy: ECB has removed deflation risks (19/Jul)
  • ECB's Praet: Inflation will take a long time to get back to target, 'process of reflation is a long one' (8/Jul)
  • ECB's Weidmann: Deflation risks are now distant (7/Jul)
  • ECB's Weidmann: Inflation expected to end 2017 somewhat lower due to falls in crude prices (6/Jul)
  • ECB's Praet: Adverse scenarios for inflation outlook look less likely, deflation risks have largely vanished (6/Jul)
  • ECB's Nowotny: Inflation targeting should contain a certain degree of flexibility (5/Jul)
  • ECB's Praet: Scenario for future inflation remains contingent on easy financing conditions (4/Jul)
  • ECB's Praet: Inflation remains volatile, prices pressures continue to be subdued (4/Jul)
  • ECB's Praet: Anchoring rate expectations is a key condition for asset purchases to deliver accommodative policy (4/Jul)
  • ECB's Draghi: Deflationary forces have been replaced by reflationary ones (27/Jun)
  • ECB's Draghi: Considerable monetary accommodation still required for inflation dynamics to become durable and self-sustaining (27/Jun)
  • ECB's Draghi: Inflationary dynamics more muted than one would expected, but factors weighing on inflation are temporary that the ECB can look through (27/Jun)
  • ECB's Hansson: Can't expect a quick transmission from monetary policy to inflation (14/Jun)
  • ECB's Smets: Better growth should stoke inflation pressures, but we aren't seeing this now (13/Jun)

QE/TAPER:

  • ECB’s Villeroy: Accommodative policy still required (19/Jul)
  • ECB's Rimsevics sees bond purchases for another 'couple of years' (13/Jul)
  • ECB's Praet: Better growth will reinforce ECB's accommodation (8/Jul)
  • ECB's Weidmann: Normalisation isn't a 'full brake', it's an easing off the accelerator (7/Jul)
  • ECB's Villeroy: Nominal rates will rise in line with the recovery (6/Jul)
  • ECB's Praet: ECB's mission is not yet completed (4/Jul)
  • ECB's Lautenschlaeger: Imperative that policy be normalised as soon as po ssible (30/Jun)
  • ECB's Weidmann: Expansive policy still needed, but can disagree about the level of accommodation (29/Jul)
  • ECB's Draghi: Normalisation will be gradual (27/Jun)
  • ECB's Weidmann: QE extension was not discussed at the June meeting (25/Jun)
  • ECB's Weidmann: Withdrawal of stimulus should be considered if economy develops as expected, ECB shouldn't change self-imposed QE limits (25/Jun)

RECOVERY:

  • ECB's Coeure: The recovery has arrived, but it's unwise to let our guard down because the recovery is cyclical (7/Jul)
  • ECB's Weidmann: Ongoing recovery raises the prospect of a normalisation of monetary policy (6/Jul)
  • ECB's Weidmann: Pace of normalisation depends on progress of inflation (6/Jul)
  • ECB's Praet: Solid upswing continues to broaden across sectors and across countries (6/Jul)
  • ECB's Praet: Economic recovery seems to have gathered momentum (6/Jul)
  • ECB's Villeroy: Non-standard policy is not eternal (6/Jul)
  • ECB's Coeure: Recovery increasingly broad-based, an encouraging development (30/Jun)
  • ECB's Draghi: All signs now point to a strenghtening and broadening of the recovery (27/Jun)

FX/MARKETS:

  • ECB’s Coeure: Currency depreciation is a side-effect of policy and neither its main transmission channel, nor its objective (11/Jul)
  • ECB’s Coeure: QE effect on exchange rates is, by and large, not fundamentally different from conventional policy (11/Jul)
  • ECB’s Coeure: Steepening at long-end of the yield curve reflects market expectations that future growth will be solid (5/Jul)
  • ECB's Coeure: International role of the euro currency has declined over the alst year, but its role as a reserve currency has increased (5/Jul)
  • ECB's Coeure: Recent market volatility has not been significant (5/Jul

Finally, some charts from UBS: