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GDP growth in 2Q 2013, after six quarters on the decline. However, confidence indices in May continued to point to a contraction in GDP. New indications are due this week, with the ZEW and PMIs. BoJ: operating adjustments and flexibility before the introduction of new measures.
Paroxysm is rife in Germany as of late, as confirmed by the debate in Karlsruhe over the ECB’s monetary policy decisions. The President of the Bundesbank, Weidmann, the only member of the governing council opposing the announcement of OMTs last September, asked the ECB’s actions to be limited, as they would risk compromising monetary stability and they would be in breach of the Maastricht Treaty. These accusations are evidently groundless, as the outright purchases, a legitimate monetary policy instrument, if ever activated, will be made only on the secondary market, solely on the short end of the curve, and will be subject to strict conditionality. The debate confirms the Bundesbank’s stubborn dissent, which in this occasion bordered on euro-scepticism. The red-clad judges of the Constitutional Court will have to issue a ruling on the legitimacy of OMTs by the end of September, most likely after the elections’ date, to be held on September 22. However, the legitimate ruling will be the European Court’s, and that would certainly seek to reassert the independence of the ECB, a key requisite for the effectiveness and credibility of monetary policy management. In our view, this entire affair will probably prove more damaging for the Bundesbank’s credibility than for the ECB’s.
Euro area industrial output in April expanded for the third month in a row, leaving the quarterly trend on course for a +1.0% q/q growth rate in June, from +0.1% in March. Thus, the industrial sector will contribute positively to euro area GDP growth in the spring months, at 0.3%. However, for the time being we stick to our forecast for a stagnation of AE GDP in the spring, following the -0.2% q/q decline at the beginning of the year. Confidence indices, and in particular the composite PMI, remain on levels still compatible with a contraction of GDP in 2Q 2013, in part due to the services sector’s typical lag. It should also be said that the sharp recovery in output recorded between March and April, exclusively in the German and French capital goods segments, may be tied to an unusual concentration of a limited number of large orders, rather than to a genuine and more widespread recovery. Confirmation of the trend reversal in the manufacturing sector is expected this week, with the June PMI indices.
BoJ: operating adjustments and flexibility before the introduction of new measures.
The BoJ meeting brought no developments. The central bank disappointed expectations for change in the duration of refinancing operations, and kept stimulus measures unchanged:
1) monetary base up by 60-70 trillion yen a year,
2) JGB purchases worth around 50 trillion yen a year, with an average maturity of 7 years,
3) ETF and J-REITs purchases by increments of one trillion and 30 billion yen a year respectively,
4) purchases of commercial paper and corporate bonds geared to holding 2.2 and 3.3 trillion yen worth of these assets at the end of 2013, with the aim of keeping the levels stable thereafter.
The assessment of the economy has improved. As regards the outlook, the central bank expects a moderate recovery, albeit marred by significant uncertainty; inflation is forecast to gradually climb back into positive territory. The minutes of the May meeting show that consensus was widespread on the fact that the massive purchases programme will help contain the rise in JGB yields. Board members also share the opinion that yields had been driven up in part by the stock market’s rally, and by the weakening of the yen, as well as by the reversal in the yield trends in other countries. On the operational front, many deem it appropriate to adapt operations flexibly to market conditions. The minutes, while reporting extensive debate on the causes of recent volatility, do not provide any details on the central bank’s strategy to contain fluctuations, barring the reference made to “flexible” operations. As was the case at the meeting of 11 June, for the time being the central bank intends to calibrate purchases (higher frequency, better distribution along all curve segments) before introducing any new measures
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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.
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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.
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