Super Mario: Full Week Ahead Preview

The main event this week will of course be the ECB and the turmoil in Spain makes things even more interesting than they would already be. Draghi is widely expected to outline the future of QE in Europe and it comes against a backdrop where the Catalan independence bid could imperil periphery spreads. Here’s the bottom line as summed up by Barclays:

President Draghi and Peter Praet have repeatedly insisted on the need to preserve a high degree of monetary policy accommodation, in order to maintain a supportive financial environment, which is still necessary to achieve the ECB goal of price stability. Lending to the economy has continued to improve over the summer, and our in-house measures of monetary, credit and market conditions have so far remained unaffected by short-term market volatility (in particular the FX market) and suggest that overall, financial conditions are still very supportive. Therefore, we believe that the GC will feel more comfortable at its October meeting next week to announce the long awaited “calibration” of its monetary policy framework, i.e. a reduction of the pace of asset purchases as from January 2018.

This telegraphing was itself telegraphed (remember: there’s now forward guidance for the forward guidance – that’s how absurd things have gotten) earlier this month when Bloomberg reported that the ECB is set to cut QE in half starting in January while extending the program for at least 9 more months. As we put it, “the ECB is going to cut QE in half, but you and Draghi can still ‘Netflix and chill’ for another nine months.” Good luck scrubbing that from your mind.

It seems likely they’ll be another round of this before it’s all said and done – that is, they’ll end up extending it again past September 2018 while cutting the total in half one more time. Here’s Goldman:

We expect the ECB to implement its monetary policy stance using a combination of asset purchases and forward guidance. We expect the ECB to announce a 12-month tapering of the APP, while maintaining its current expected sequencing of no policy rate hike until ‘well past’ the end of net asset purchases. A 9-month open-ended extension is also likely (given recent ECB communication) and we overall have less conviction in the exact announcement at the October meeting. Such an open-ended scenario would likely still imply a total of 12 months of purchases (with further extensions announced in June or July next year). In either case, continued purchases for 12 months, together with the ‘well past’ language on policy rates, would effectively signal a first rate hike well into 2019. Bond scarcity considerations limit the length of asset purchases. Our base case considers the trade-off in terms of length of purchases (and its implication for forward guidance), with the ECB’s view that any changes to the purchase pace should be gradual and ‘prudent’.