Recap 7-03-13: ECB Tomorrow

Commentary:

Despite the rally in Euribor contracts today, the white contracts (<1y to maturity) actually sold off a bp or two. Market participants appear to be concerned about the reduction in excess liquidity in the Euro Area, driven by paybacks of the ECB’s LTRO. A reduction in excess liquidity much below 200bn is very likely to push 3m Eonia settings towards the ECB’s refi rate of 50bps – almost 40bps higher than current levels. The higher Eonia settings would, in turn, put pressure on Euribor settings. The ECB could cut the refi rate again to 25bps to offset this, although whether they will do that is far from certain. As a result, 6m and 6m6m Eonia forwards remain elevated.

The ECB looks likely to address this issue at tomorrow’s meeting. Draghi has repeated said that the ECB is monitoring money market conditions in the statements following ECB meetings this year. And just a week ago Coeure noted specifically that the ECB is looking at the term structure of money market rates:

  • There was no mention of money market conditions in the January statement
  • Feb 7th: (following a jump in Eonia rates in Jan) Repayments are provided for in the modalities of the three-year LTROs and are at the discretion of the counterparties… We will closely monitor conditions in the money market and their potential impact on the stance of monetary policy, which will remain accommodative with the full allotment mode of liquidity provision.
    Question: Mr Draghi, you included a new section in the Introductory Statement linking money market conditions to your monetary policy stance. Can we conclude from this that you are ready to counter any possible increase in market rates as a result of a liquidity drain with a possible cut in the main refinancing rate?
    Answer: To the first and the third question: we do not pre-commit but, as I said, our monetary policy stance is accommodative; our overnight interest rates are close to zero. So, there are plenty of signs that we are in the full allotment mode and ready to offer liquidity to the banking system as needed.
  • Mar 7th: We are closely monitoring conditions in the money market and their potential impact on the stance of monetary policy and the functioning of the transmission of our monetary policy to the economy. Our monetary policy stance will remain accommodative with the full allotment mode of liquidity provision.
  • Apr 4th: We are also closely monitoring money market conditions and their potential impact on our monetary policy stance and its transmission to the economy. As said on previous occasions, we will continue with fixed rate tender procedures with full allotment for as long as necessary.
  • May 2nd: we are closely monitoring money market conditions and their potential impact on our monetary policy stance and its transmission to the economy. In this context, we decided today to continue conducting the main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 6th maintenance period of 2014 on 8 July 2014… Furthermore, we decided to conduct the three-month longer-term refinancing operations (LTROs) to be allotted until the end of the second quarter of 2014 as fixed rate tender procedures with full allotment.
  • There was no mention of money market conditions in the June statement, as 1y Eonia swaps had remained below 10bps since Feb
  • 6/25 Speech by Benoit Coeure: Let me state quite clearly that I do not intend to drop any hints about a change in the monetary policy stance in the euro area in the near future. A reversal would not be warranted by current economic conditions. Economic growth is projected to remain weak this year and inflation is expected to remain clearly below 2% for the euro area as a whole. The various non-standard measures that have been introduced by the ECB to support monetary policy transmission in certain market segments will stay in place as long as necessary, and there are other measures, standard and non-standard, that we can deploy if warranted. Therefore, at the current juncture, there should be no doubts that our “exit” is distant and our monetary policy is and will remain accommodative… The monetary policy stance of the ECB will remain accommodative for as long as needed, and we will look with an open mind at standard and non-standard monetary policy tools if warranted by the outlook for price stability. In particular, we have to ensure that our effective monetary policy stance, as measured, among other indicators also by the term structure of money market rates, remains aligned with the Governing Council’s assessment, and with the outlook for price stability.

Notable:

  • US ADP rose to 188k in June vs 160k exp and 135k prev
  • Services PMIs for June:
  1. US Non-Mfg ISM declined to 52.2 vs 54 exp and 53.7 prev
  2. EU Service PMI was revised lower to 48.3 vs 48.6 exp and prev
  3. Italy Services PMI declined to 45.8 vs 47 exp and 46.5 prev
  4. France PMI was revised higher to 47.2 vs 46.5 prev
  5. German PMI was revised lower to 50.4 vs 51.3 prev
  6. UK PMI rose to 56.9 vs 54.5 exp and 54.9 prev
  7. China Non-Mfg PMI declined to 53.9 vs 54.3 prev. The HSBC measure was stable at 51.3 vs 51.2 prev

Portugal’s President Silva has announced that he will meet both the PM and other political leaders tomorrow to try to resolve the crisis triggered by the request yesterday from the leader of the junior party in the governing coalition to resign from government. Portugal 10-year bonds sold off, with yields surpassing 8% for the first time since November 2012,

EU and IMF leaders gave Greece three days to reassure them that Greece can deliver on conditions attached to the bailout to receive the next tranche of aid. A Greek finance ministry official tells Reuters that his government expects to reach agreement with the ‘troika’ by Monday’s Eurogroup meeting on all issues expect public sector reforms. The official said “It won’t be the end of the world… In the worst case scenario we will have to increase the issuance of T-bills, we will delay repaying arrears and it could lead to further cuts to payments.”

Australia Trade Balance jumped to 670mm in May vs 53mm exp and 28mm prev

RBA governor Stevens deviated from the speech text yesterday and commented that the Board " we deliberated for a long time to leave the cash rate unchanged.” The market interpreted this to mean that the decision to keep rates unchanged just narrowly won out.

Upcoming Data:

  • Thu: US holiday, BoE, ECB,
  • Fri: US Employment, Canada Employment
  • Mon: Japan Current Account, Eco Watchers Survey, Canada Building Permits, BoC Loan Officer Survey, NAB Business Conditions, China CPI
  • Tue: Canada Housing Starts
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