Recap 9-5-12: ECB Expectations


Consensus expectations for the ECB tomorrow appear to include ECB purchases of Spanish and Italian front ends. Many also appear to expect some loosening of collateral requirements, but not rate cut or LTRO. 2yr Italian debt is currently trading just north of 2.5% yield.

That sounds reasonable. Explicit caps or intervention sizes takes away some flexibility as well as some of the ECB’s ability to exert pressure on the fiscal authorities, so the ECB may not announce them. Note also that, just to keep up appearances, the ECB will likely sterilize the purchases, possibly via the issuance of some bills or a minimum size for the deposit facility. BUT – to attract sufficient demand, the ECB will have to keep policy rates NON-NEGATIVE. In other words, a negative deposit facility rate is likely off the table – a view that is against broker consensus.

This all suggests that there may be some positive sentiment in the immediate aftermath of the announcement, followed by uncertainty as to how much the ECB will do and how the Bundesbank will react. In other words, déjà vu!


  • UK Service PMI improved to 53.7 vs 51.2 exp and 51 prev
  • Italy Service PMI improved to 44 in Aug vs 43.3 exp and 43 prev
  • China HSBC Service PMI declined to 52 in Aug vs 53.1 prev
  • FedEx cut their forecast last night to $1.37-$1.43 versus the street at $1.56. “Weakness in the global economy constrained revenue growth at FedEx Express more than expected in the earlier guidance.”
  • FRB: Currently, we estimate all programs combined are holding down the 10-year yield by about 65 basis points

Upcoming Data:

  • Thurs: ECB, BoE, French Unemployment, US ADP, Jobless Claims, ISM Non-Mfg
  • Fri: UK PPI Output Core, US Non Farm Payrolls, Canada Employment
  • Sun: China IP, Retail Sales, Trade Balance, Japan Current Account, Eco Watchers Survey
  • Mon: EU Sentix Investor Confidence, Australia NAB Business Confidence, China Money Supply
  • Tues: Canada Housing Starts, Trade Balance

2 thoughts on “Recap 9-5-12: ECB Expectations

  1. Hi GMT

    I think you need to be careful in assuming that they cant cut the depo rate to negative (and cap the current account). The bill issuance to sterilise any bond purchases would still be more attractive than eonia since it would be 1week or 1mth term and so probably a higher rate. Certainly while the market is awash with liquidity. Also in a way it makes it less attractive to sell peripheral paper since you would essentially be exchanging it for the low yielding bills.


    1. Hi Chimp – thanks for sharing your thoughts! Allow me to share my thinking in more detail.

      I think the ECB has to prepare for a scenario where they buy a LOT of Periphery bonds and therefore have to sell a LOT of bills. In that scenario, massive bill selling would be risky for 2 reasons. First, the ECB may need to pay high rates if issuance gets too high. Second, the bills would essentially be competitors to periphery short term debt, as you alluded.

      Furthermore, having a non zero bill rate but a negative deposit or current account rate is somewhat self defeating. As issuance rises, fewer and fewer banks would use the deposit facility.

      There’s also the general rationale behind a cut. The problem, as the Draghi has ALREADY recognized, is not the rate itself, but the transmission mechanism. Risking negative interest rates when the transmission mechanism is blocked does not seem useful, and the ECB appears to recognize it.

      Finally, the ECB and the Fed work together – and the Fed (especially the NYFed) has made their views against zero and especially negative deposit rates well known. They have undoubtedly shared this research w/ the ECB staff and will have colored their thinking on this.

      On balance, I think this suggests additional deposit facility cuts will be limited going forward. Unfortunately, from a trading perspective this does not appear useful because Euribor futures have never come close to discounting negative Euribor rates.

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