ECB preview: no big changes ahead of Jun 10th meeting
- No material changes expected
- More hawkish (EUR positive) more likely than more dovish
- Brighter economic outlook since March
The European Central Bank (ECB) convenes on Thursday (Jun 10th) amid a much rosier economic outlook than at the start of the year. But with the central bank having communicated its plans to front-load asset purchases, there is not expected to be any material change in policy or communication. It will be hard to avoid taper talk so how the ECB responds to questions around tapering will be of central importance to the market’s expectations and the euro.
At the March meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but that it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point.
Yields have been pressing higher but have retreated from the May peaks. The increased pace of asset purchases that was agreed in March came as a response to rising yields at the time. But the economic outlook – chiefly driven by a strong vaccine rollout that was slow to start but is now firing on all cylinders – has improved greatly since then. The ECB has been taking the line that inflation is temporary and rising bond yields reflect better fundamentals, so I don’t think it will be unduly concerned by a higher rate environment now due to the better economic picture. This will make talk of a taper very difficult to ignore. The language around the speed of asset purchases may change somewhat, and this could drive EZ yields + EUR higher. It will be very interesting to see what the ECB says about the state of financing conditions and it is sure to continue to tie PEPP purchases to maintaining these as ‘favourable’.
The big risk for EUR crosses around this meeting is: does the ECB silence taper talk with enough vigour to keep yields in check, or does it allow the market to think the more hawkish voices are winning the argument about when the central bank eventually exits emergency mode.
Inflation has picked up since the last meeting, which could see the forecast for 2021 and 2022 revised upwards from the March level. EZ inflation rose to 2% in May from 1.6% in April, the first time it’s been on target in over two years. With growth in Q1 a little light, the rebound in the summer should mean GDP projections remain broadly unchanged.
What has the ECB been saying lately?
ECB speakers have been offering a few titbits since the last meeting. Of particular importance to the speed at which the ECB will exit emergency mode, Christine Lagarde stressed that inflationary pressures will be temporary – sticking to the global central banker script. At the April meeting she said tapering talk was premature.
Kazaks and Lane made it clear policymakers will look at the asset purchase programme again in June, which could involve scaling back the programme if the economic situation is better. There were dovish comments from the Panetta in late May, noting that it was too early to taper bond purchases. Banque de France Governor, Villeroy de Galhau, stressed that the ECB is going to be at least as slow to tighten as the Federal Reserve.
But we’ve also had warnings about financial stability risks stemming from rising levels of sovereign debt. Vice president de Guindos warned of a “legacy of higher debt and weaker balance sheets which … could prompt sharp market corrections and financial stress”.
Right now, the price action has flipped above the 5-day moving average (RHS), so we look for a confirmation of this move (close above today and a green candle again tomorrow) for a bullish signal. On the LHS, the longer-term view of the daily MACD divergence is raising a warning flag.