Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Trader Strategy
Head of Macroeconomic Research
Summary: This week's ECB meeting was set to be a non-event. It was without counting on the release of the central bank's strategy review on 7 July. We expect the new policy framework will make the Governing Council more committed to its dovish stance, at least in the short term. But investors might struggle to see major adjustments to the ECB's forward guidance this week. In our view, the upcoming meeting will mostly be a repeat of the previous one with slight adjustments to the ECB's wording and outlook. Behind the scenes, we believe that the divisions between the doves and the hawks about the future of the bond purchase remain intact.
Overall, ECB Christine Lagarde is likely to lean dovish. Investors might be disappointed if they expect major adjustments to the ECB’s forward guidance. Given the rapidly changing economic outlook due to the spread of the Delta variant, which is now the dominant strain in most member countries, and the risk of upside inflation surprise, there is a material risk that the ECB will delay any policy announcements until it has more data available after the summer season. If circumstances make it necessary, the new policy framework can give the Governing Council more latitude to act fast when it will meet again on 9 September.
What NOT to expect ?
What to expect ?
How far the ECB is able to go ? Behind the scenes, we expect a very heated debate between the doves and the hawks about the future of the bond purchases, as it was the case for the ECB June meeting . Recently, Lagarde hinted the existing Pandemic Emergency Purchase Programme (PEPP) would be followed by a “transition into a new format”. We think there is a broad agreement the PEPP will run until March 2022. But it is unclear how much support Lagarde will be able to gather to replace the PEPP by a new program whose format, duration and objective have yet to be clearly defined. It is certainly not until early 2022 that we will have more indications of what the ECB is ready to do and can do taking into consideration the hawkish minority of its governing council. The two other factors which will play a key role in the future of the bond purchases are the outcome of the German federal elections of 26 September and how fast the eurozone will get back to its pre-crisis level – at the moment, it should happen in early 2022.