Widely expected a couple of weeks ago, the relaunch of QE now seems less certain. A lot of questions will have to be answered at the upcoming ECB meeting, which promises to be one of the most entertaining events of the year! Please find below what we expect:
- Rate cut: It is a close call between a rate cut of 10bps and 20bps; we would tend to lean towards 20bps; QE: There will be a
- QE announcement, but we might not have all the details and it might be delayed (starting December 1st for instance
- Public debt (PSPP): Yes, we think QE will include government debt but the share of QE it represents will be smaller than in previous QE programs. They will have to raise issuer limits first to avoid technical constraints;
- Corporate debt (CSPP): It is perhaps the easier aspect to forecast; Yes, QE will include corporate bonds. Different working papers from the ECB conclude that CSPP not only helped large corporates, but also eased credit conditions for SMEs via the loan channel;
- Size: Something around 20-30bn€, with a large share or private debt. We think they will not go full size as it might put Mrs. Lagarde in a difficult situation should the economic situation worsen;
- Open ended or not: No, but 12 months minimum.
- Tiering: We think further rate cuts will be accompanied by tiering, to avoid a heavy hit to the banking sector. We could be surprised by the details;
- Forward guidance: We expect the ECB to reinforce its forward guidance policy:
- They might link forward guidance to achieving their inflation target (without mentioning a level);
- Or they can link it to the asset purchase program (as was the case with former QE programs).
- Economic forecast:
- They could cut their Euro area GDP forecast by 10bps both in 2019 and 2020;
- They could cut their Euro area inflation forecasts by 10bps both in 2019 and 2020.
Uncertainty seems high nowadays so we might witness significant volatility following the ECB meeting and consequently we have trimmed down our risk budget. But all in all, we do not think the ECB will underdeliver considering current market expectations.
Disclaimer
This commentary is intended for professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.