ECB Call: Looking for slower monthly purchases under PEPP

Macro
Christopher Dembik

Head of Macroeconomic Research

Summary:  We are onside with consensus in expecting no change to monetary policy at this week's Governing Council. Overall financing conditions appear very easy. This opens the door to slower monthly purchases under the Pandemic Emergency Purchase Programme (PEPP) in Q4, from 80bn EUR per month to 60bn EUR per month - with little market impact. ECB doves, such as Chief economist Philip Lane, are likely to play down the significance of this announcement. We also expect the ECB to revise upward its staff projections given the positive economic momentum in the eurozone this summer.


Stronger growth… : ECB minutes from 21-22 July confirmed there is some optimism in the air : « Risks to the outlook remained broadly balanced [...] the possibility of a faster than expected draw-down of savings represented some upside risks to the outlook ». The spread of the Delta variant is not a major issue from an economic point of view. More than 70% of the adult population in the European Union is now fully vaccinated. This is a major milestone. The re-introduction of restrictions to travel or to go out is highly unlikely this fall, in our view. Given the positive economic momentum, we expect the ECB will revise upwards its macroeconomic projections for this year and next year.

…But upside risks to the inflation outlook : The euro area inflation has increased noticeably this summer. But a majority of Governing Council members will likely dismiss the latest high inflation number as temporary phase, mostly driven by one-off factors. In July, the euro area industrial producer prices rose more than expected at 2.3% versus prior 1.4%. In August, the euro area CPI first estimate climbed to 3.0%  versus prior 2.2% - way above ECB’s former inflation target. The increase mostly results from higher commodity prices and transportation costs, but first and first and foremost, from base effects. This is a key factor driving CPI distortion in France, for instance. August French CPI was out at 1.9%. Last year, the summer sales took place in August. This was not the case this year, hence the apparent acceleration in prices of manufacturing products (+1.3%). The recent evolution of prices tends to confirm the ECB’s risk analysis. However, if the increase in energy and intermediate goods continue, there is a real risk that higher producer prices will be passed on to consumers. This would result in lower consumer spending.

A technical adjustment to the PEPP purchases : Overall financing conditions appear very easy. The ECB systemic stress indicator is back to where it was before the outbreak, at 0.03 (see Chart 1). This indicator, initially developed in 2012 in the midst of the euro area sovereign debt crisis, is based on fifteen financial stress measures. This is a good way to assess the overall financing conditions in the euro area. Added to the positive economic momentum in the euro area this summer, this supports the call for a slower pace of asset purchases in Q4. We expect asset purchases to slowdown from €80bn per month to €60bn per month. This would be similar to the volume of January-February 2020. ECB doves, such as Chief economist Philip Lane, are likely to play down the significance of this announcement in order to avoid the market interprets it as a signal of tapering. In our view, the market impact of the technical adjustment to the PEPP purchases will be marginal.

Talks about exit strategy are premature : Looking ahead, we believe ECB hawks will push further in favor of an exit strategy from emergency monetary policy measures. Initially, we expected the debate about the future of the PEPP to happen in December/early next year. But it might happen earlier. Unless the pandemic revives in the coming months, it is unlikely the PEPP will be extended beyond March 2022. Two options are on the table : a transitory accommodative asset purchase programme (which has been mentioned by ECB President Christine Lagarde earlier this summer) or a boost to the monthly volumes in the Asset Purchase Programme (APP). There is no point to try to forecast a rate hike from the ECB given it is very far, far away. From an investor’s perspective, a rate hike basically does not matter.

 

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.