when the emotions tempers already - conclusions after the ECB conference

hello,

 

In reference to my earlier musings, and my assumed movements which I expected from the ECB, I would like to present below my point of view regading the incident and what should be expected in the near future.

 

But at the beginning of the link to familiarize yourself. <link>

 

message of the day: ECB Cuts Deposit Rate To Negative For The First Time Ever

 

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.15%, starting from the operation to be settled on 11 June 2014.

- The interest rate on the marginal lending facility will be decreased by 35 basis points to 0.40%, with effect from 11 June 2014.

- The interest rate on the deposit facility will be decreased by 10 basis points to -0.10%, with effect from 11 June 2014. As in negative. As in deposits are now charged a fee.

 

the full announcement

The ECB also introduces a new program - TLTRO:

- Draghi unveils package of tergeted LTROs, work to prepare QE;
- Draghi says initial size of targeted LTRO plan is 400Bln euros;

- Loans will maturity in September 2018;

- The value of loans to individual banks, will depend on the growth of bank lending each generated by new loans from the ECB;

- In the event that the banks did not increase lending, will have to repay the loan earlier to the ECB;

- Each bank will be able to borrow a value not exceeding 7% of its total lending as of 30 April 2014 (in the amount of credit will not be counted for the financial sector loans and mortgages);

- As part of the loan gets even restrictions that would make loans went to the real economy sector;
- ECB extends fixed rate full allotment, suspends SMP sterilizing;
- Draghi says package includes preparations for ABS purchase.

 

In other words, even more actions along what was expected: keep in mind the last time the ECB did €1 trillion in LTROs it did exactly nothing to boost inflation or the "real economy." Furthermore, the ABS purchases aren't activated: just being "prepared." However, what was not revealed was the biggest wildcard: European QE, which as we said repeatedly, won't happen until Europe's deflation is far worse, if ever.

Speaking of growth: cut of 2014, while boosting 2015 and 2016:
- ECB sees 2014 GDP growth of 1% vs. 1.2%;
- ECB sees 2015 GDP growth of 1.7% vs. 1.5%;
- ECB sees 2016 GDP growth of 1.8% vs. 1.8%.

Inflation is revised lower across the board relative to prior forecasts:
ECB sees 2014 inflation at 0.7% vs. 1%;
ECB sees 2015 inflation at 1.1% vs. 1.3%;
ECB sees 2016 inflation at 1.4% vs. 1.5%.

Furthermore:
Draghi: ECB to extend existing eligibility assets as collateral.

Nothing specific about QE

Mr Draghi was asked several times during the press conference about the likelihood of a large-scale asset purchase programme. As expected, Mr Draghi did not rule out this possibility, saying that it was an option should the need arise. But he gave no further hint as to whether Fed-style QE involving significant outright purchases of domestic sovereign debt has become more likely. In any case, the ECB will first want to see how the new measures work before it considers a QE programme in earnest. We continue to assess a probability of just 15% to an LSAP programme involving sovereign debt through year-end.

One ordinary (but capped) 2-year LTRO plus a Targeted LTRO

The ECB will conduct 2 TLTROs in September and December this year. Banks will be allowed to borrow 7% of their outstanding loans to the non-financial private sector excluding mortgages (according to the ECB, this amounts to €400bn). In our understanding, banks can post any eligible collateral for these two operations. The interest rate of the TLTROs – the MRO rate at that point in time plus 10bp – will be fixed over the maturity of the operation. There will be four additional TLTROs between March 2015 and June 2016. Borrowing under these operations can be up to three times a bank’s net lending to the Euro area private sector (excluding mortgages) between April 20, 2014 and the allotment date of the TLTRO. All TLTROs will mature in September 2018. Should net lending be lower than a – yet to be determined – benchmark, banks will be required to repay their borrowings by September 2016.

 

The main difference between these new Targeted LTROs and the previous ones is that banks will have to increase their net lending to the private sector in order to get the full benefit of the 4-year maturity. But for those banks that are not willing or able to do so, the ECB has offered a regular 2-year LTRO at 25bp. It is difficult to say ex ante how much demand there will be. But given that a positive carry exists between such 2-year borrowing and (say) peripheral sovereign debt, we could see significant take-up and a resulting net injection of liquidity.

Close to lower bound for rates

When asked during the press conference whether further rate cuts were likely, Mr Draghi appeared to signal that the lower bound had been reached. To be sure he did not rule out the possibility of further small cuts but neither did he suggest that this would be the preferred choice. One interesting detail of today’s decision was that the marginal lending facility was reduced by more than the MRO or depo rate, thereby establishing a symmetric corridor again. We interpret this narrowing of the corridor from the top as an attempt to reduce the volatility in EONIA.

I hope I explained it quite clearly all the changes which he has made yesterday Mario Draghi. Equity markets as well as market debt (bonds) on that information, responded optimistic about reaching the German DAX and SP500 American historical highs.

If you have any additional questions. Feel free to write e-mails to me.

regards,
oscarjp