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ECB 19th January (continued thread from December 2016)


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euro-area-inflation-cpi.pngeuro-area-inflation-cpi (1).png

Above are 2 interesting charts inflation vs unemployment, but the second chart with brent and eu inflation shows an interesting correlation, (have not calculated, but relationship seems positively correlated). Therefore one could assume that if we see oil prices continue upwards, wage growth increase and a falling euro currency then tapering of the QE program will be on everyones radar. 

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ECB: Pressure to taper but Draghi won't waver – HSBC


Research Team at HSBC notes that the Eurozone inflation is rising sharply, and the hawks might start asking for an early tapering of QE but Mr Draghi made a shrewd move in December, announcing an extension of QE to at least end-2017 and with underlying inflation subdued, HSBC doubt the ECB will be bowing to pressure just yet.

Key Quotes

“In December, Eurozone inflation climbed to 1.1% y-o-y, the highest level in over three years. There is more to come, and we think Eurozone inflation could reach 1.8% by February (even higher in some countries, such as Germany). With growth picking up, some of the more hawkish members of the ECB Governing Council may start to call for tapering QE as early as the 19 January meeting.”

“However, the majority of the Governing Council remain worried about muted underlying price pressures, despite the rise in headline inflation. Core and services inflation remain around 1%. As noted recently by ECB board member Ives Mersch – typically at the more hawkish end of the spectrum within the ECB Governing Council – wage growth is still too weak in the Eurozone. The ECB will also be wary of tightening monetary policy too soon, repeating the mistake of 2011 when it hiked rates, helping to curb the fragile recovery.”

“Perhaps anticipating the hawkish calls, the ECB announced in December a nine-month extension of QE – albeit at a slower purchase pace – until the end of 2017. At that time, although the oil price had already increased significantly, it was not yet reflected in the ECB inflation forecast, meaning it still projected a meaningful undershoot of its "close to but below 2%" target.”

“All in all, we think that the ECB will be on hold in January, and indeed in the coming months, looking through the inflation peak in the first half of next year before having to make a decision on the possible future of QE. And given that we think underlying inflation will remain stubbornly low, in our view QE will continue at EUR60bn per month until the end of the year, and then at a slower pace (EUR40bn per month) from January 2018.”

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Today's ECB rate decision likely to be a non event but the presser will be closely watched for hints to the winding up of QE and the prospect of rate rises in the future. Rate decision at 12:45. Presser starts 13:30, usually lasts about 45 min. Will be looking for trade entries once presser has finished and price has decided on direction (if any).




Yellen's speech last night lifted the dollar with hints of an increasing number of US (small) rate rises this year.


US Dollar Basket (DFB).png190117.png

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What to look out for from the ECB

Bond buying, Brexit and Italian banks likely to be under scrutiny

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The solid, albeit unspectacular, performance of the eurozone’s economy towards the end of 2016 all but rules out any monetary policy changes at Thursday’s meeting of the European Central Bank’s governing council. But there is a growing acceptance within the bank that it is running short of ammunition to counter any fresh political or financial shocks. Expect Mario Draghi, ECB president, to face questions on the limits of the bank’s quantitative easing process and economic risks when he faces journalists at 1.30pm London time. A statement due out at 12.45pm will almost certainly confirm that the bank has left its benchmark interest rate, the main refinancing rate, at zero. The levy charged on most of the deposits parked at the eurozone’s central bank is set to stay at 0.4 per cent. Here’s what to expect from his press conference. QE terms The ECB said in the accounts of its December vote that the decision to trim its monthly bond purchases from €80bn to €60bn was partly driven by concerns they could struggle to find enough assets to buy.


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Before then, Mr Draghi had suggested the ECB would carry on buying bonds until inflation was certain to hit its target of just under 2 per cent. Economists have criticised what they view as a big shift in the central bank’s stance, with some claiming the ECB is no longer as committed to its inflation target. The ECB president will face scrutiny on how long he thinks the central bank will be able to keep up its bond buying should underlying inflation remain weak. He could also say more about how the bank plans to buy some of the eurozone’s most expensive sovereign debt. Some bonds for the stronger eurozone economies, such as Germany, are so expensive that they are trading at yields lower than the ECB deposit rate of minus 0.4 per cent. Until December, the ECB had refused purchases of sovereign debt with yields below the deposit-rate floor. But a policy change allows the central bank more flexibility on what bonds it can buy. The Bundesbank, Germany’s central bank, bought bonds for yields below minus 0.4 per cent this week. Inflation If inflation were to carry on rising at the pace of past months, the ECB would be delighted: it would be on track for its inflation target and would be able to stop buying bonds by the spring.


Between November and December, annual inflation in the eurozone shot up from 0.6 per cent to 1.1 per cent. In Germany, motor of the eurozone, the shift was even more dramatic — prices rose 1.7 per cent in the year to December. The spurt will not last: it largely reflects the change in the oil price. Mr Draghi may point out that recent rises in the headline rate contrast with a lower reading for core inflation. Still, the scale of the rise in Germany has already led to a fresh round of calls from lawmakers in Berlin for the ECB to raise rates. Italian banks Italy may have averted a banking crisis late last year by approving a €20bn bailout fund for the country’s troubled financial sector, but the health of lenders remains of prime concern. Monte dei Paschi di Siena, the lender at the centre of the troubles, is set to receive €6.5bn in fresh capital from the state. Agreeing the terms of the bailout is set to take Italy and Brussels around a month, to ensure compliance with EU rules on state involvement in bank rescues. Before then, the ECB is set to issue an opinion on the €20bn fund. Mr Draghi could come under fire for the central bank’s decision to raise the figure for the amount of precautionary capital that it thinks MPS needs from €5bn to €8.8bn. Italian critics accused the ECB of a lack of transparency and failing to do enough to explain the decision (Banca d’Italia has since published this guidance). The US Donald Trump’s pledge to slap a 35 per cent tariff on BMW if it exports from plants in Mexico to the US have stirred concerns in Germany that the incoming US president will damage the country’s business model. Mr Trump has also started to question how helpful the stronger dollar is for the US, threatening to remove an advantage for eurozone manufacturers — though it may be difficult for Mr Trump to reverse the currency’s gains at a time when the US Federal Reserve is alone among the main central banks in raising rates. Brexit One big implication of the UK’s intention to quit the single market is on the clearing of payments denominated in euros, much of which takes place in London. The ECB has in the past pushed for oversight, calling for big clearing houses to decamp to the currency area, but lost a court case at the ECJ in 2015. Officials in Frankfurt and Brussels may make a fresh push for euro clearing to move to the eurozone, perhaps on the grounds that business in London will no longer fall under the scope of EU law. Mr Draghi may not want to say anything on the matter on Thursday — but the rules of where euro clearing takes place could form part of any post-Brexit deal.


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