"ECB Or Not To Be": Here's What Mario Draghi May Say Tomorrow

Looking at tomorrow’s main event, the much anticipated ECB announcement in which Draghi may (or may not) announce a hawkish shift to the centrral bank’s policies and/or reveal the bank’s tapering plans, Citi (whose titled we borrowed) gives the 30 second summary, and says that the market seems quite split on whether the ECB will remove the asset purchase program easing bias, but thinks that there’s room for mild disappointment. After all, it says, this meeting is just a warm up for the September meeting (and Jackson Hole). CitiFX Strategist Josh O’Byrne points out that the biggest market fear at the moment appears to be long positioning and “this risks morphing into FOMO for the next leg higher.” For the press conference, Citi expects Draghi to slightly tweak some of the language from Sintra to lean a little bit more towards the dovish side.

The bank’s expectations are summarized in the following handy cheat sheet:

From UBS, here is a big picture menu of ECB policy choices for normalization:

Another snap preview comes courtesy of SocGen which says that questions on possible exit scenarios should dominate the press conference.

While acknowledging the strength of the economy, Draghi is likely to counter any ideas of an imminent and rapid path towards ending QE, instead urging patience with the still-subdued inflation outlook. We maintain our call for an announcement in September of a six-month extension of the APP into 2018 at €40bn/month, followed by data-dependent quarterly reductions. Meanwhile, we expect the euro area consumer confidence indicator to stabilise as historically high levels (SGe 1.3%) in July. Elsewhere, in the UK, we look for only a modest bounce in retail sales in June.

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With the intros out of the way, Below is an extensive preview of what to expect, courtesy of RanSquawk

ECB Preview: Rate Decision due at 1245BST/0645CDT and Press Conference at 1330BST/0730CDT

All rates and the current pace of asset purchases are expected to be left unchanged.

There is a slight chance the ECB may adjust guidance on asset purchases following recent source reports.

Draghi may reiterate his most recent comments made at the Sintra Forum in his press conference.

RATE/ASSET PURCHASE EXPECTATIONS

DEPOSIT RATE: Forecast to remain unchanged at -0.40%. The rate was last adjusted in March 2016, when it was cut by 10bps.

REFI RATE: Forecast to remain unchanged at 0.00%. The rate was last adjusted in March 2016, when it was cut by 5bps.

MARGINAL RATE: Forecast to remain unchanged at 0.25%. The rate was last adjusted in March 2016, when it was cut by 5bps.

ASSET PURCHASES: Forecast to maintain the pace of asset purchases at EUR 60bln per month until December 2017. Last December, the ECB reduced the size of purchases by EUR 20bln per month, and extended the purchase horizon by nine months.

CURRENT ECB FORWARD GUIDANCE

RATES: “The Governing Council stated that the key ECB interest rates are to remain at present levels for an extended period of time, and well past the horizon of the net asset purchases.” (ECB statement, 8/Jun)

ASSET PURCHASES: “Net asset purchases, at the monthly pace of EUR 60bln, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” (ECB statement, 8/Jun)

GROWTH: “Risks to the growth outlook are now broadly balanced” (ECB statement, 8/Jun)

INFLATION: “Headline inflation has been recovering from the very low levels seen in 2016… Measures of underlying inflation remain low and are expected to rise only gradually over the medium term, supported by our monetary policy measures, the expected continuing economic recovery and the corresponding gradual absorption of slack.” (ECB statement, 27/Apr). Draghi (27/ Jun): “the threat of deflation is gone and reflationary forces are at play”.