Europe Economic Weekly Muddlenomics

Ruben Segura-Cayuela, Chief European Periphery Economist - Viernes, 29 de Agosto

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Last week, Draghi’s speech at Jackson Hole delivered the message that coordination between monetary policy, fiscal policy and structural reforms is necessary to pave the way to sustained growth. Together with these considerations, we see some steps in the right direction (e.g. in France and Italy). But these are baby steps and it is hard to see more being delivered at this point by either national governments or the EU. In the next few months it will up to the ECB to push the euro area, at least temporarily, away from this very fragile outlook. We think the ECB is likely to do so, although we still don’t expect this to happen in September, and it is not clear to us whether it will be ambitious enough. In any case, it is still an open question whether others will be able to act on the extra time provided by the ECB.

 

In this context, next week ECB meeting will draw all attention. As we have argued before we think that ABS purchases will take place (likely before year-end), and that QE could become a reality before June next year. We do not rule out smaller measures in September, such as fine-tuning the upcoming TLTROs or a detailed timeline of how and when ABS purchases could take place, given the need to deliver after the market’s reaction to Draghi’s speech. We could even get some small purchases being announced in September, but this would not be a major innovation without a clear timeline of what may come next. However, in our view, none of these would change the outlook substantially. More details:

 

1.    We believe Draghi will not be able to convince the governing council to adopt broad-based QE just yet. Upcoming (announced) measures, inflation print this week, improvement in M3 all give excuses to the hawks.

2.    Regarding ABS QE, it makes sense only if it provides credit, capital and deleveraging benefits to the bank, and any purchases in September could offer only funding. But this cannot be ruled out on the back of Draghi’s comments at Jackson Hole. Draghi could give us a timeline of when this might take place (perhaps end-Q4) and an idea of sizing. That said, most of the events that could lead to a powerful programme of ABS purchases are beyond the ECB’s control at this point.

3.    We could get be more generous TLTRO terms, 10 days ahead of the first auction. Several options are available: it could reduce the spread with MRO to 0, it could change the 7% threshold, or it could include securitization in the benchmarks to avoid hampering further securitization markets. This would not face much resistance at the council, in our view; it would make TLTROs more interesting for core banks, and fit well with Draghi’s statement at Jackson Hole.

4.    We do not think rate cuts are likely. Cutting rates now or suggesting possible rate cuts in the future risk a low take-up for the September TLTRO. A rate cut in September would also create further uncertainty about future moves. Draghi has stated twice that we are at the lower bound when it comes to rates, and only technical adjustments should be expected. Questioning this would also not help TLTRO take-up.

The weekly view: Baby steps (muddling through) not enough We consider Draghi's speech at Jackson Hole, the French government reshuffle and Italy's reform package as steps in the right direction. But these are baby steps and we don't expect more to be delivered by either national government or the EU. 

Euro area: One small step for Draghi, one big (missed) step for the ECB? 

We still think that ABS purchases will take place, and that QE could become a reality before June next year. For September, we do not rule out smaller measures, such as fine-tuning TLTROs or a timeline of how and when ABS purchases could take place. 

UK: BoE quiet again after the noisy minutes 

We envision the BoE leaving interest rates and QE on hold next week, issuing no accompanying statement as usual. 

Peripheral watch: Italy: Reform announcement 29th August 

On Friday, Aug. 29, PM Renzi will likely lay out the programme "for the next 1000 days" and provide details on some of the reforms they have been working on over the summer, among which are the package "Sblocca Italia", education and justice reform. 

The week ahead: 

Next week, we expect Euro Area GDP for 2Q 2014 to come in unrevised from the flash releases, at 0.0% qoq and 0.7% yoy. The ECB should leave the key interest rates unchanged, as should the BoE. 

 

Date	GMT	Country		Data/Event		For	BofAML		Cons.†	Previous
01-Sep	09:00	Euro area		Manufacturing PMI (F)		Aug	50.8			50.8
03 Sep	09:00	Euro area		Services PMI (F)		Aug	53.5			53.5
03 Sep	09:00	Euro area		Composite PMI (F)		Aug	52.8			52.8
03 Sep	09:30	UK		Composite PMI		Aug	58.2			58.8
03 Sep	09:30	UK		Services PMI		Aug	58.5			59.1
03 Sep	10:00	Euro area		Retail Sales (yoy)		Jul	1.2%			2.4%
03 Sep	10:00	Euro area		GDP (qoq, sa, P)		2Q	0.0%			0.0%
03 Sep	10:00	Euro area		GDP (yoy, sa, P)		2Q	0.7%			0.7%
03 Sep	10:00	Euro area		Gross Fix Cap (qoq)		2Q	0.1%			0.2%
03 Sep	10:00	Euro area		Govt Expend (qoq)		2Q	0.0%			0.7%
03 Sep	10:00	Euro area		Household Cons (qoq)		2Q	0.2%			0.2%
04 Sep	12:00	UK		Bank of England Bank Rate		Sep	0.50%		0.50%	0.50%
04 Sep	12:00	UK		BOE Asset Purchase Target		Sep	375bn			375bn
04 Sep	12:45	Euro area		ECB Main Refinancing Rate		Sep	0.15%		0.15%	0.15%
04 Sep	12:45	Euro area		ECB Marginal Lending Facility		Sep	0.40%		0.40%	0.40%
Source: BofA Merrill Lynch Global Research, Bloomberg, Reuters, Central banks
Ratings calendar 5th September
Country			Agency		Stance			Expectation
Portugal			Moody's		Stable			Stable

Source: Bloomberg, BofA Merrill Lynch Global Research 

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