UBS:
It's hard to see trading in Europe becoming more lively in the near term. Lagarde is doing here best here to link the PEPP to financing conditions, emphasising that with financing conditions noticeably better (and the economy expected to improve from here) then a recalibration of monetary policy was appropriate.
It's not hard to extend this to the PEPP being wound down next year. It begs the question of what the ECB does next though and I worry they are backing themselves into a corner.
If PEPP is about financing conditions and rates are about inflation then people are right to ask when the ECB are next cutting rates. That's not to say more easing is the answer to Europe's problems. It probably isn't. Rather that with negative rates and an EUR8trn balance sheet, inflation is still only forecast to be 1.5%.
What else can they do or is the path to Japanification now set in stone. One fact has stayed with me all summer. A premonition for the Schatz?
WESTPAC:
Blink quickly and you would have missed any genuine moves in the markets relating to the ECB’s policy statement or Press conference.
The reduction of PEPP purchasing being only a moderate lowering of pace was supportive of regional bond spreads, as displayed by the narrowing of the 10yr Italian BTP to Bund spread of over 5bps to 102bps.Longer dated Euribor futures also lifted 2bps to reflect the relative low staff projections
EUR/USD dipped from 1.1830 to 1.1810 in a minor reflection of a less hawkish profile to the ECB. The profile was slightly more pronounced in EUR/GBP which slid from 0.8565 to 0.8535. European stock markets did rebound but this was as much a reflection of the lift in US stocks. Euro Stoxx 600 regained unchanged levels from being down -0.5% into the ECB announcements.
Despite mild lifts in growth, inflation and unemployment, the ECB assumptions for financial markets actually lowered the 3-month Euribor level to -0.5% for the end of their forecast period, down from -0.3% in June. A mild positive though is the projected unwind of higher debt to GDP that was evident in June. Debt seen as 93.6% of GDP at the end of forecast period from 95.2% in June.
ING:
The only tangible change at today’s ECB meeting was an end to the front-loading of asset purchases under the Pandemic Emergency Purchase Programme or, as ECB President Christine Lagarde called it, ‘a recalibration’. Instead of the ‘significantly higher pace’ of purchases than at the start of the year, the ECB will now conduct the purchases at ‘a moderately lower pace than in the previous two quarters’.
Tapering in the eurozone will definitely look differently from tapering in the US. As with so many things, it will be more complicated in the eurozone. Judging from today’s decisions, any hints on tapering should not be looked for in the PEPP but rather in the ECB’s plan for the APP. The ECB does not deem it necessary to extend the PEPP beyond the planned March 2022, given that the ECB expects the eurozone economy to have returned to its pre-crisis level by the end of this year.
The long-awaited acknowledgement of potentially higher inflationary pressure also implies that the PEPP will not be extended but that the APP will be increased. The moment to announce details of the rotation out of PEPP and into APP will be the December meeting. At that meeting, a possible decision on the Targeted Longer-Term Refinancing Operations will also be taken. The rotation will not be an unwinding of all asset purchases as potentially seen in the US. Instead, any tapering in the eurozone will likely follow a stop-and-go approach and could last well into 2023; unless the ECB changes its take on inflation even further in the coming months.
ECB watchers can take a break in October. It's the December meeting which will be the mother of all ECB meetings.
BBVA:
All in all, the meeting was in line with expectations and, barring new shocks, we will not have more relevant news until December. In this regard, we expect some kind of transition or “bridge program” between PEPP and APP as a backstop to avoid a financial cliff when the PEPP expires, possibly endowed with leftover funds from PEPP. We find it more difficult for the ECB to provide more flexibility or increase purchases for the more permanent APP given the lack of consensus within the Board, although this possibility is not out of the cards.
Core inflation will edge up gradually as the recovery progresses and the economic slack declines (1.3% in 2021, 1.4% in 2022 and 1.5% in 2023). The ECB is closely watching second round effects, but for the moment they do not see signs of it.
ECB September Statement Changes via BBVA:
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