Lagarde ECB speech: What to watch for
Head of Macro Analysis
Summary: Our take on Lagarde's speech this morning in Frankfurt.
Context: The ECB is still dovish as revealed by the latest comments of members of the Governing Council. We have summarized some key recent headlines below.
- Lane: doesn’t think that the ECB is at the limit yet.
- Vasle says there is “still room” to ease policy.
- Guindos: ECB won’t reach limits on QE program “shortly”.
- Muller says more assets could join stimulus list in slump.
The ECB wants to give the impression that it can further support economic activity, if necessary. However, if it chooses to do so, it will probably have to think twice about diversifying the assets it repurchases. According to our estimates, the ECB already owns around 80% of Germany’s debt and roughly 70% of France’s OATs. If the ECB decides to extend and/or increase the size of the QE program in the future, it will need to make a trade-off between buying lowest-rated Eurozone government bonds and buying high grade corporate bonds. From our viewpoint, the ECB’s next major step will be to buy more corporate debt.
Interestingly, for the first time since the introduction of the accommodative monetary policy, the ECB has made a mea culpa regarding the impact of negative rates. In a report published two days ago, the ECB strongly emphasizes on the side-effects of negative policies, mentioning that it leads to “excessive risk-taking” and hurt bank profitability. One of the key upcoming debate within the Governing Council will be to evaluate at what level the disadvantages of negative rates tend to surpass the advantages.
On another note, the latest ECB minutes released yesterday were uninformative. The ECB has reiterated its strong call on governments to do more on public investment and fiscal stabilization wherever possible. We heard it before, but we expect the ECB will get louder and clearer on that point in coming months.
What to expect today:
Many ECB watchers hope Christine Lagarde will finally deliver a speech on monetary policy and will give the direction the ECB is heading. We believe they will be quickly disappointed. Given the flagrant dissension within the Governing Council, she could play safe and wait for the ECB press conference taking place on December 12 to really take a stand. On this occasion, the ECB will update its economic forecasts and will unveil its first projections for 2020.
We are all aware that Christine Lagarde does not have strong views on monetary policy yet. When she was appointed, we did our research and we only found two speeches over the past years covering monetary policy issues. In 2013, invited as a speaker by the Fed of Kansas City, she endorsed unconventional tools, including the OMT program. In 2016, she supported the introduction of NIRP.
In the short and medium term, she is very unlikely to revolutionize central banking, and she is most likely to increase pressure on Eurozone governments to use fiscal policy.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)