20181206-法国巴黎银行-ECB_preview__Staying_the_course_9页_966kb

ECB Policy Outlook: Staying the Course

Core Content

This document provides an analysis of the European Central Bank's (ECB) policy outlook ahead of its December 2018 meeting, focusing on the potential end of net asset purchases, reinvestment modalities, forward guidance, and TLTROs. It also includes a trade idea related to German government bonds (Bund ASW).

Key Messages

• The ECB is expected to end net asset purchases at the December meeting, likely with dovish language.
• The reinvestment details are expected to be technical and not include major surprises.
• The ECB will emphasize that ending net purchases does not equate to withdrawing accommodation.
• Forward guidance and TLTROs are the main tools the ECB may use if inflation outlook deteriorates.
• The staff forecasts for 2019 and 2020 are expected to show a slight downward revision in growth and inflation, but not enough to suggest a shift in policy stance.
• The ECB may communicate a minimum reinvestment horizon of at least three years, but this is unlikely to be a significant market move.
• A TLTRO for 2019 is still a possibility, especially to address liquidity issues from the aging TLTRO-II program.

Trade Idea

• Action: Sell Bund ASW
• Entry: 55.8bp (add on any move to 58.5bp)
• Target: 48bp
• Stop: 61bp
• Current Level: 59.6bp

The document argues that the current levels of Bund ASW are attractive for initiating short positions due to the embedded premium and the potential for tighter ASW in January due to heavy EGB supply.

Staff Forecasts

• GDP: Expected to decrease by 0.1pp to 1.7% in 2019 and remain at 1.7% in 2020.
• Headline Inflation: Projected to fall by 0.2pp to 1.5% in 2019 and 0.1pp to 1.6% in 2020.
• Core Inflation: Expected to drop by 0.1pp to 1.4% in 2019, but rise to 1.7% in 2020 and 1.8% in 2021.
• The ECB is unlikely to change its policy stance due to the minor adjustments in the forecasts.

Net Purchases

• The ECB is likely to end net asset purchases in December, but the justification is more about the lack of sufficient bonds to purchase rather than a lack of need for stimulus.
• Continuing purchases of private sector assets would be a surprise, but are considered less likely due to the accumulation of credit risk.

Reinvestments

• The reinvestment modalities are expected to be technical and not significantly alter the policy stance.
• The ECB may communicate a minimum period for reinvestment, but this is unlikely to be more than two years.
• The new capital key is expected to be applied to upcoming reinvestment flows rather than the total stock of PSPP, which would minimize market impact.

Forward Guidance

• The ECB may consider introducing forward guidance on the steepness of the interest rate hiking path, but not before Q1 2019.
• The Council is likely to emphasize a gradual pace to support inflation convergence.
• The document suggests that such a move could inadvertently focus market attention on interest rate hikes, hence the delay.

TLTROs

• A TLTRO announcement is not expected in December, but a new TLTRO for 2019 is still an option.
• The purpose of a new TLTRO would be to address liquidity and funding issues from the aging TLTRO-II program.
• A longer-term facility with a fixed rate would be seen as more dovish than a shorter-term one referencing the deposit rate.

Communication Strategy

• The ECB will use a dovish tone to maintain confidence in the inflation trajectory.
• The Council will stress that it is attentive to the slowing economy and the potential for adverse shocks.
• The risk assessment is still considered balanced, and the Council is unlikely to signal a shift in policy yet.

Conclusion

• The ECB is expected to stay on its normalization course, ending net asset purchases in December.
• The document concludes that the ECB will continue to use forward guidance and TLTROs as its main tools to respond to economic shocks.
• A 20bp deposit rate hike is forecast for September 2019, with risks of a smaller or later move.
• The ECB will emphasize the breadth and power of its stimulus arsenal, including the possibility of further TLTROs.