BofAML: El BCE llega antes que Santa Claus (Euro Area Watch)

Redacción - Lunes, 30 de Noviembre

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Euro Area Watch: ECB Preview: how to overtake Santa •   We expect an extension of QE until 09/17 at least, an expansion in purchases up to EUR70bn and a small depo cut (10 bps)
•   We see a risk that the depo cut goes a bit deeper (-20 bps), but we don't think depo will be the "icing on the cake"
•   The icing could be TLTRO for longer and steps toward a slightly different wording of the definition of price stability

How to avoid the Christmas day blues

Obviously, since Draghi performed a miracle once -- in the summer of 2012, when he almost single-handedly stopped the sovereign crisis -- and then a second time last winter, when, after having deftly explored all the other weak alternatives, he imposed QE on the Governing Council, he is expected to do so on a regular basis. This has created an interesting configuration: not only does the market aggressively price the next layer of accommodation, but it also expects -- demands -- to be surprised to the upside.

This means that if the ECB merely does on 3 December what is effectively priced by the market, we could collectively wake up on 4 December feeling a bit deflated, like a child discovering on Christmas day that his parents "only" gave him what he/she had asked for, without the "little extra" that would have kept him/her smiling all day long.

A thorny issue this time is that, while it is possible to get a sense of what's priced on the depo cut front -- its "easy to trade" -- it is very difficult to assess what the market is exactly expecting on QE. Indeed, there is no straightforward "rule of thumb" linking whatever extension in time/expansion in quantity we get on 3 December to any particular level of yields, if only since any technical tweaking on the purchases could have tricky market consequences (see ECB: why it's back to the drawing board).

"Market consensus" -- the sell-side published median expectations -- seems to stand around a 10-20 bps cut in the deposit rate, an extension in QE of sixmonths and no or small expansion in the pace of buying. We don't differ that much from this consensus.

We also expect as a baseline a 10 bps cut in the deposit rate, and we acknowledge a noticeable risk that it goes a bit deeper (-20 bps). We continue to see as unlikely a "big depo cut' toward the levels seen in Switzerland and Sweden, and we also maintain our view that, with this instrument, the ECB is putting themselves in a quite thorny configuration.

We are, however, more gung-ho than consensus on the extension in time -- we have 12 months, to September 2017, which, in our view, would offer much-needed protection against any contagion from higher US yields to Europe -- but not on expansion (we have 10bn/month), since we believe that going much further would raise very tricky politico-technical issues.

If we are right, what could be the "icing on the cake" that Draghi has gotten us used to? Two things that, in our view, have rather strangely dropped from the radar: TLTRO for longer and the first steps toward a slightly different wording of the ECB's definition of price stability.

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