Head of Macroeconomic Research
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.
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.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
