As we learned in March, the ECB is getting pretty adept at leaking market-moving information about possible policy turns to Reuters.
You’ll recall that late last month, Reuters reported – citing unnamed sources – the following:
- ECB policy makers wary of changing their message before June, Reuters reports citing unnamed officials.
- One ECB person said to say message of March 9 press conference was over-interpreted
So that was really convenient because, when combined with Fed messaging designed to walk back the dovish nature of the March hike, it created a return to the policy divergence theme that had underpinned the dollar prior to March 15.
On Tuesday, Reuters is back, this time with 3 unnamed sources delivering this message:
European Central Bank policymakers are breathing a sigh of relief after the first round of France’s presidential vote put a pro-euro centrist in pole position, but they are not likely to change their policy stance until June.
Three sources on and close to the bank’s Governing Council told Reuters that with the threat of a run-off between two eurosceptic candidates in France averted, and with the economy on its best run in years, many ratesetters see scope for sending a small signal in June towards reducing monetary stimulus.
There is, however, little appetite to change at this Thursday’s meeting the pledge to buy bonds at least until the end of the year and to keep rates at rock bottom until well after that.
A move in June, however, might mean changing the wording of the ECB’s opening statement to reflect improved prospects for the economy.
Some or all the references to prevailing downside risks to the outlook, to the possibility of further rate cuts or to larger asset purchases may be taken out, the sources said.
“The discussion will be on removing some of the easing biases,” one of the sources said. “I can’t say how quickly it will happen because that depends on the data.”
You can probably guess what happened next. Here’s Bloomberg:
- EUR/USD rose to a fresh high at 1.0925 while gaining to a one-month high versus the yen as model-driven demand for the cross continues to push through markets ahead of Thursday’s ECB meeting.
- EUR gains accelerated after a Reuters report that French election result may prompt a change in the ECB’s language in June
- Market continues to speculate on whether ECB will use more upbeat language to describe the economic outlook; to be sure, Draghi on Friday reiterated that the inflation pick-up remains unconvincing and risks for euro-area growth “remain tilted to the downside”
- At same time, EUR and JPY continue to see unwind of haven trades set before French vote, muddying the FX picture
- EUR filled offers at 1.0900/05, faces further supply around the Monday high at 1.0937, traders said
This is particularly amusing because now, instead of anonymous Reuters leakers trying to walk back a perceived hawkish message, you’ve got unnamed Reuters leakers apparently attempting to telegraph a hawkish shift in June. Last month, policy meeting preceded Reuters leak. This month, Reuters leak precedes policy meeting. All kinds of fucked up forward and backward (mis)guidance.
Of course they’re talking about June, and that’s a long way away. Thursday’s meeting, as noted above, isn’t likely to be accompanied by any fireworks. Read below as BofAML explains why the Reuters leakers are probably right about June, but that being said, it isn’t time to “rock the boat” just yet.
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No need to rock the boat yet
Given the recent focus on political developments, we think it is easy to forget the ECB’s Governing Council is due to meet on Thursday. Our sentiment is that there is a consensus at the Governing Council to leave the current stance and communication largely unchanged for now, even if we think this consensus does not extend on which decisions to make, when the time comes. This means that while we do not expect any hard decision or any significant communication surprise this week, we also believe the policy conversation could be quite fierce from June.
We continue to think that in the face of a still subdued inflation outlook, prudence will prevail and the ECB will opt for small changes to forward guidance in June, slow tapering in 2018 and no policy rate hike before well into next year. Still, the hawks – and some centrists – at the ECB appear to be tired of extraordinary measures, meaning the market could price a more aggressive stance in the second half of this year.
Peace in our (short) time
In our opinion, most Governing Council members in March were not expecting their tiny move on forward guidance to trigger such an impressive market reaction. After engaging in concerted damage mitigation in the two weeks before the Easter break, we think they will be looking for some peace and quiet at the April meeting. We note in particular that even some hawkish hardliners, such as Governing Council Hansson, have recently stated that the ECB is “looking at the data,” which suggests that even this block of the Council is not after an immediate policy discussion. At the same time, Board member Coeure was keen to say the ECB was “very, very serious about forward guidance,” which did not sound like having another go at this essential part of their communication was on their wish list.
We think there are several reasons behind this truce. First, the data provides fodder for hawks, who will focus on strong surveys pointing to swift output gap reduction, and doves, who continue to worry about weak core inflation and hard data, which do not fully live up to the surveys’ promise. Second, the March episode, with the market hastily pricing depo rate hikes, will remind Council members that moving market expectations is more art than science, with significant risks of overreaction. Third, the political context–the ECB meets between the two rounds of the French presidential elections– goes against making big moves.
Fire beneath the ice
Still, the debate is going on underground. We think Benoit Coeure – who in his role of “market man” at the board is probably quite sensitive to the need to provide investors with sufficient visibility – is trying to gently move the communication toward a very slow “Exit strategy”. This week he stated that the balance of risks to growth is now neutral: the council statement kept it “tilted to the downside” last month. He has been very candid on the direction of travel for the ECB since December, e.g., in his speech at the end of last year about the need for governments to prepare for higher interest rates, so he is probably keen to prepare the market for a gradual removal of QE.
Peter Praet–the chief economist, i.e., more focused on macro developments–for his part continues to insist on the weakness in inflation and last week stuck to the negative balance of risks.
More profoundly–those are limited divergences we think–hawks are probably still ready to argue for a swift decommissioning of the ECB’s unconventional arsenal as soon as the political situation allows it.
Baseline and risks
In our baseline, the statement does not change this week. In June, the assessment of the balance of risks would move to neutral, while the most dovish part of the forward guidance–the notion that rates could fall further–would be removed (a cheap bone to throw to the hawks, in our opinion).
Then in September the Council would start preparing the market to slow tapering in 2018 (eg, going first at EUR40bn for six months before gradually moving to zero by the end of 2018) while the forward guidance on rates would be more thoroughly changed; dropping the notion that there would be a long delay before the end of QE and the first hikes, while opening the door to some “technical tweaks” to the depo rate, which would not materialize before well into next year. In our baseline, the ECB would still be a net purchaser of securities at the end of 2018 (to be clear, would stop by December 2018).
It seems to us the market tends to focus on a hawkish alternative to this, with fast tapering and quicker rates. We agree that is what the noises from the hawks and centrists suggest. But we also continue to believe core inflation will disappoint the ECB. That is what motivates our belief in a very, very slow and considered exit.