January 23, 2015

Exceeding Consensus Boldly

Our central expectation going in to the ECB meeting was that President Draghi would try to exceed expectations. He is a past master of this, very skilled at manipulating opinion and then over-delivering

Our central expectation going in to the ECB meeting was that President Draghi would try to exceed expectations. He is a past master of this, very skilled at manipulating opinion and then over-delivering. The problem is that markets have got increasingly used to this tactic, with the ‘whisper number’ for QE over EUR100bn higher than the EUR500bn which had been floated by his Executive Board colleagues just a couple of weeks ago. In the event, and with some presentational double-counting, he was able once again to produce numbers which beat consensus.

The EUR60bn a month headline includes the Asset Backed Securities Program (ABSPP) and the Covered Bond Program (so-called CBPP3) which started in late November and late October 2014 respectively. Those two programmes have bought EUR2bn and EUR33bn so far, which amounts to around EUR12bn per month, leaving the net new money today at EUR48bn per month (or pretty close to the EUR50bn media reports of yesterday). But, any disappointment on the detailed breakdown is more than offset by a pledge to carry out its new purchases until end-September 2016 “and will in any case be carried out until the governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to 2% over the medium-term.” On quick back of the envelope numbers, we see the net EUR48bn of new money over at least 19 months will amount to EUR910bn. Add back in the ABS and CBP of around EUR230bn and, hey presto, we get to EUR1.14tln which is marginally above the much talked about EUR1tlbn balance sheet expansion.

As for the identity of the bond purchaser and the thorny issue of ‘burden sharing’, there is a bit of a messy compromise. The ECB will buy only 20% of the sovereign bonds; the rest being devolved to the National Central Banks based on the Euro system’s capital key. Germany is out in front with an almost 18% weighting, France on 14%, Italy at 12% and Spain at almost 9%, with the fixed timetable – it seems – designed to prevent any foot dragging from reluctant participants. No names mentioned but they can be found on Wilhelm Epstein Strasse.

The answer to yesterday’s question “how many different big figures will EUR/USD trade on after the announcement?” was four, although it was one-way traffic rather than being particularly volatile. The low print has been 1.1363 with EUR/AUD dropping from 1.4300 to 1.4083; again, four different big figures but not breaking down through last Friday’s 1.4006 low.

As the country gears up for its official national day on January 26th, we’d expect the current low of this cycle in AUD/USD (0.8033) to hold today, though it may well be tested as the ‘Big Dollar’ remains well-bid. When the dust settles post-ECB, however, the 2.60% available on Australia’s AAA-rated 10 year government debt looks pretty attractive compared to the 1.40% on BBB Spain. For sure, there’s no QE buyer in Australia. But that is because it doesn’t need one…

Coming up today/ tonight

No data releases in Aust/NZ today but there is the HSBC China flash manufacturing PMI. In Europe we get flash estimates for Germany, France and the EU, and there’s also a US version of the Markit number. Retail Sales in the UK are expected to reflect the “Americanisation” of Christmas. Consensus looks for -0.6% m/m in December after the chunky 1.6% increase in November driven by aggressive discounting on Black Friday. In North America, consensus looks for a 2.4% m/m increase in US existing home sales. In Canada, CPI is expected to slow from 2.0% y/y to 1.6% with retail sales down around -0.1% m/m.

Next week it’s the FOMC on the 28th, RBNZ on the 29th and the first RBA meeting of the year a week later on February 3rd.


ECB QE program sees Euro lower: Eurostoxx 600 +1.7%, Dax +1.3%, CAC +1.5%, FTSE +1.0%. Dow +242 points to 17,796, +1.4%, S&P 500 +1.4%, Nasdaq +1.3%, VIX 16.27 -13.7%. Shanghai +0.6%, Mumbai +0.6%, Nikkei 225 +1.4% and ASX 200 +0.4%; ASX SPI futures this morning +0.9%. US bond yields: 2s at 0.52% (1), 10s at 1.89% (+2). WTI oil at $46.74 (-2.2%), Brent at $48.94 (-0.2%), Malaysian Tapis (yesterday) $49.14 (+2.6%). Gold at $1302.60/oz (+0.7%). Base metals: LME copper -1.8%, nickel -1.2%, aluminium -0.1%. Iron ore $66.8/t -1.5% Chinese steel rebar futures +0.0%. Soft commodities spot futures: wheat -0.5%, sugar -0.1%, cotton -0.4%, coffee -0.8%. Euro Dec 14 CO2 emissions at €6.84/t (-7.7%).

The ECB announced a €60bn/month QE program to avert deflation

US jobless claims (w/e 17 Jan, payrolls week) 307K(L: 316K; E: 300K); FHFA House prices (Nov) 0.8% (L: +0.6%; E: +0.3%)


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