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Though inflation in the eurozone isn’t even half that of the U.S., the central bank debate is the same on both sides of the Atlantic — when the rate of bond purchases should slow.
As with the Federal Reserve, most expect any tapering decision from the European Central Bank to wait for a few months. The ECB’s decision on the Pandemic Emergency Purchase Program, which in May was used to buy €80.7 billion of bonds, is the detail traders will focus on when the interest-rate decision is announced at 1:45 p.m. Central European time (7:45 a.m. Eastern) on Thursday. ECB President Christine Lagarde holds her press conference at 8:30 a.m. Eastern, when U.S. consumer-price data will be released.
Economists at Morgan Stanley led by Jacob Neil say the ECB will keep the current pace of purchases. Financing conditions have tightened, as not only has the yield on German bunds
TMBMKDE-10Y,
risen but the spread to fixed-income securities of periphery countries like Italy
TMBMKIT-10Y,
and Spain
TMBMKES-10Y,
has widened. With the European Union now issuing bonds to fund the Next Generation recovery fund, an ECB decision to taper would lead to further tightening conditions.
The EU COVID-19 vaccination program, the Morgan Stanley economists add, is still less than half way to the target, and the EU recovery fund money still hasn’t been doled out. At the current rate, the full €1.85 trillion of PEPP capacity would be exhausted in February.
Economists at Credit Suisse led by Neville Hill, by contrast, articulate a more contrarian case that the ECB will cut the monthly purchase rate on the PEPP to €60 billion, though the bank still expects the full program will be used. PEPP, they note, wasn’t designed to bring core inflation up, but rather to keep it from falling further — which has happened. With key economic indicators improving, they expect the ECB “to slacken its leash on the bond market.”
“Either way,” add economists at Deutsche Bank led by Mark Wall, “we expect the ECB to argue June is an operational decision on the appropriate pace of purchases, not a strategic decision to keep or exit PEPP.” The Deutsche Bank forecast is for the current bond purchase rate to be maintained, in what they see as a “close call.”
The Stoxx Europe 600
SXXP,
stock-market index, in dollar terms, has slightly outperformed the U.S. S&P 500
SPX,
with a 14% rise in 2021. The euro
EURUSD,
has been steady vs. the dollar.
Here’s what analysts at other firms say:
Berenberg: “Beyond the decision on the projected pace of asset purchases in the next three months, markets ought to watch this Thursday whether the ECB: hints that it could use the inbuilt flexibility of its key purchase program to still slow the pace over the summer at short notice, or without any notice, in response to growth and inflation, provides clearer clues what it would need to see in financing conditions or economic data to start tapering in September, and/or raises its 2023 staff projection for headline inflation from 1.4% to beyond 1.5% (unlikely).”
Nomura: “We expect the ECB to revise its 2021 inflation forecast substantially to the upside, but to show a medium-term inflation forecast still well below target. That, together with rising sovereign bond yields, should be enough to keep the ECB’s commentary at this meeting fairly dovish.”
RBC Capital Markets: “Whilst the economic data is improving, along with the health crisis, the recovery is in its infancy and rising inflation is still seen as transitory by ECB officials. Moreover, the bond market selloff and an appreciating euro remain a risk to the ECB’s pledge to keep ‘favorable financing conditions’ and we think the ECB will not be convinced that the time is ripe to slow the pace of purchases, a view that is also supported by the recent dovish shift in ECB communication.”
