ECB Forum : A clear roadmap for the December meeting
Head of Macro Analysis
Summary: While the era of monetary dominance is likely come to an end, central banks all around the world are still coming up with new creative ways to try to improve monetary policy transmission and mitigate the side-effects of the current second pandemic wave. Recently, the Bank of Japan announced a special deposit facility to trigger a M&A wave in the banking sector while the RBNZ unveiled a new Funding for Lending programme to reduce banks' funding costs and reduce interest rates. Yesterday it was the turn of the ECB to send a strong and committing signal to the market in favor of new measures to cope with the virus and its economic consequences. Central bank innovation continues to avoid a lost decade.
Yesterday, at the Sintra virtual ECB Forum, Christine Lagarde delivered a powerful and committing introductory speech (see here the full transcript):
“The ECB was there for the first wave and we will be there for the second wave. We are, and we continue to be, totally committed to supporting the people of Europe” (November 11th).
The forum continues for a second day, with a special focus on falling natural rates, fiscal policy and financial instability. Lagarde, Powell and Bailey will participate as speakers to the panels this afternoon. You can follow the live session here.
Lagarde’s comments echoes the opinion of Vice Fed Chair Clarida :
“I can assure you that we are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust and rapid as possible” (October 14th – here the full transcript).
In further details, Lagarde provided important insights to market participants ahead of the December meeting. Here are the main takeaways:
- Lagarde explicitly dismissed rumors that the ECB is looking to pressure euro area member countries to take loans from the European recovery plan.
- The PEPP (Pandemic Emergency Purchase Programme) and TLTRO (Targeted Longer-Term Refinancing Operations) are likely to remain the main tools for adjusting the ECB’s monetary policy, thus indicating that a further rate cut is not on the table at the moment.
- The ECB is expected to further support the banks, which means more favorable TLTRO.
- Lagarde insisted mostly on duration of QE, rather than on the level of support necessary to keep financial conditions accommodative, which points out to an extension of the current main asset purchases programme in the near term. It also means that the ECB is not inclined to buy the remain amount on the envelope of €1850bn by December this year.
In conclusion, we expect the following measures from the ECB next month:
There are still some work to be done by the Committees but we have already a very clear and strong signal from Sintra indicating that all the options are on the table and that further support will be provided at the December meeting. Combined with positive vaccine news that are likely to pop up in the coming weeks (we are waiting for Moderna’s update on its vaccine), the continued central bank support will keep fueling expectations and positive mood in the market at least until year-end. Investors have already priced in bad economic data related to the re-imposition of lockdowns and we don’t see much risks ahead, with the exception of the risk of shutdown in December in the United States that might have a limited market impact if it materializes. No need to say that Brexit is not on your list, we still believe that in the next two weeks a bare bones free trade agreement will be reached between the United Kingdom and the European Union. Therefore, the market rotation into cyclical, value stocks and especially emerging market assets that has occurred since early November, with strong performance from Asian indexes and currencies, is only starting and more gains are coming.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.