Intesa Sanpaolo: The European Central Bank’s monetary policy meeting of 28 October will be merely interlocutory, an intermediate stop on the way towards the important decisions that will have to be made and communicated on 16 December.
Abonnieren Sie unseren kostenloser Newsletter
By Luca Mezzomo Economist
Although no important announcement will be made next week, the ECB will take this opportunity to reassert its stance on policy rates and cool expectations for a hike that have recently emerged in money market curves. Over the past few days, several members of the Governing Council have already spoken out to stress the fact that such expectations are at odds with the decision-making rule introduced following the
strategy review.
For what concerns the December decisions, we confirm our expectations for an announcement PEPP net purchases will be discontinued as of 31 March 2022, combined with some changes to APP management, possibly stepped up by means of a temporary envelope, and a new TLTRO programme designed as a safeguard tool.
On occasion of the press conference of 9 September, President Lagarde clearly indicated the 16 December meeting as the one at which the European Central Bank will make crucial decisions on the PEPP, on TLTROs, and on a potential recalibration of other tools to smooth the exit from the PEPP. Therefore, the monetary policy meeting to be held on 28 October is prospected as being entirely interlocutory.
The wording of the monetary policy decision communication should be the same as in September, including the section on “moderately” smaller net purchases under the PEPP than in 2Q and 3Q 2021. The trend of the real economy remains consistent with the staff’s forecasts; inflation was again higher than expected, although the prospect of a decline in 2022 is still motivated. Financing conditions remain favourable, considering that the rise of nominal rates has not filtered through to real rates, that sovereign spreads are stable, and that the exchange rate has weakened. Market inflation expectations, undoubtedly on the rise over the past few weeks, are roughly consistent with the ECB’s target.
The press conference should confirm and strengthen the acknowledgement that upside risks exist to the staff’s inflation forecasts, as opposed to balanced risks on growth. At the same time, however, President Lagarde may use the press conference to reassert that expectations for a policy rate hike at the end of 2022 are at odds with the guidance on rates contained in the monetary policy decision .
The ECB could use the meeting to better define the exit strategy, by laying out the priorities in the preparatory work needed to be done by the staff ahead of the mid-December meeting. Over the past few weeks, news agencies have reported rumours (not always consistent) on how the APP could be revised, presumably referred to one or more options the Council intended to consider, and on which further exploratory work was requested. For what concerns the strategy to exit the PEPP, see the last section. Lagarde will probably opt not to make commitments on the final outcome of the process, although she may provide more detailed indications on the elements that could be included in the recalibration. The need to communicate with the markets would become more urgent should the ECB lean towards a more restrictive mix of measures than expected by market consensus, of which the ECB is aware thanks to its Survey of Monetary Analysts.
Verbal action under way to quench premature expectations for rate hikes In October, rates as implied by 3-month Euribor futures with December 2022 maturity increased by 9bps, placing the rise compared to current levels at 20bps. OISs are pricing in higher rates by 13bps by the end of 2022. In our Weekly Economic Monitor of Friday 15 October, we expressed the view that a rate hike at the end of 2022 would be incompatible with the ECB’s guidance on policy rates, given both the difficulty in respecting the retrospective principle on underlying inflation by next June, and because this would imply closing the APP at only a few months distance from the unwinding of the PEPP. Furthermore, we believe the markets are currently underestimating the relevance of the ECB’s change in course following its recent strategy review.
Over the past few days, the ECB has also started to act to counter the market’s movement:
– In an interview with Bloomberg, on Monday 18 October the Governor of the Bank of Italy, Ignazio Visco, said that market expectations on rates “are not that much in line” with the ECB’s stance1.
– Philip Lane, member of the Executive Committee, said on 19 October that market expectations are not consistent with the guidance offered by the ECB on policy rates2;
– On 19 October, the Governor of the Banque de France, Villeroy de Galhau, said that there is no reason for the ECB to hike rates next year, and also reasserted his view that inflation will drop back below 2% in 20223.
During the press conference of 28 October, we expect Christine Lagarde to be asked to comment on the expectations for a rate hike at the end of 2022 that the markets still seem to be pricing in. The ECB president will once again reassert that, based on the staff’s forecasts, inflation could dip back down below 2% in 2022, and that underlying inflation will stay too low. The president could also reassert that rate hike at the end of 2022 would not be consistent with forward guidance. We currently believe rates could be raised starting from 2023H2. Decisions to be made on 16 December: what we know and needs to be discussed For what concerns the decisions to be taken on 16 December, the members of the Governing
Council have been very cautious in making statements on the mix of actions they consider most appropriate. The ending of the PEPP on 31 March 2022 seems certain: the pandemic crisis seems to have been overcome, and surveys show this scenario has already been embraced by the market consensus. Some statements seemed to indicate that the APP could be made little more flexible, for instance by setting goals in terms of net purchases over longer periods, rather than monthly, to better compensate for the impact of seasonal effects on issuance and temporary shifts in market sentiment. However, some Council members have been steadfast in rejecting the possibility of the APP being made as flexible as the PEPP. Several governors mentioned the possibility of the supranational debt limits under the PSPP being raised.
Uncertainty is greater on the ECB reaching an agreement to temporarily increase the volume of net purchases under the APP. Equally uncertain is the possibility of the ECB renewing the TLTRO programme, although an agreement could be reached on launching a “guarantee” LTRO programme stripped of the incentives offered by TLTRO III.
Appendix
Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld
Newsletter
