Global Daily – The trillion euro ECB rumour

by: Nick Kounis , Peter de Bruin

140407-Global_Daily_Insight.pdf ()
  • Leaks surface of trillion euro ECB QE simulations – amount difficult to achieve with ABS alone
  • US labour market seems to be getting back on its feet, with nonfarm payrolls growing by 192K
  • German factory orders pick up – details bode well for eurozone investment growth

Claims ECB conducted trillion euro QE simulation

Eurozone government bond yields and the euro were pushed down late on Friday following an article in the German newspaper Frankfurter Allgemeine Zeitung claiming that the ECB had simulated scenarios assessing the effects of a one trillion euro asset purchase programme on inflation. This would raise inflation in 2016 by 0.2-0.8% according to the report. Designing a QE programme focused on private sector loans – as has been suggested by the ECB – does not look straightforward. For instance, the market for securities backed by SME loans is rather small, at around EUR 120bn, while RMBS account for just below EUR 800bn. In both cases, the distribution between member states varies sharply. Meanwhile, France has started a scheme where a number of banks have pooled SME loans in a special purpose vehicle, which will subsequently issue securities backed by these loans. In coming days it will test the water with private investors. If this construction proved successful and was adopted in other eurozone member states, then a more sizeable market could develop, which could then be supported by ECB purchases. However, this seems like it would take quite some time. Another alternative, is that the central bank launches a modest ABS programme, similar to its past covered bond programmes, focused on easing credit tensions, rather than seriously boosting the money supply. ECB Executive Board member Coeure has suggested that QE was not necessary in the current situation, but left the door open for another rate cut. We think this indeed would be the likely first step of any ECB monetary easing going forward.

German factory orders bode well for investment growth

Factory orders in Germany rose by 0.6% mom in February, following a moderate 0.1% expansion in January. The less volatile %3mo3m growth rate fell from 1.7% to 0.8%, which seems to be in line with recent data for the global manufacturing industry signaling that the sector experienced a temporary soft patch in the first quarter. However, foreign orders for capital goods were relatively resilient at +2% 3m-o-3m. Foreign orders for German capital goods tend to be a rather good indicator for fixed investment growth in the eurozone, which expanded by 1.1% qoq in 2013Q4. We expect the recovery in fixed investment to be sustained on the back of ebbing uncertainty related to the eurozone crisis, healthy corporate balance sheets, improving profitability and historically low debt servicing costs. Still, tight bank lending conditions will probably limit the pace of the upswing.

US labour market back on its feet

The US labour market report provided more signs that the economy is shaking off the effects of the bad weather. US nonfarm payrolls rose by 192K in March, which was close to the consensus forecast of a 200K gain. However, the previous two months were revised up. As a result, average monthly employment growth in the first quarter amounted to 178K, just 20K less than seen in the final quarter of last year. Stronger conditions could also be seen in the workweek, which had fallen from 34.5 hours in November to 34.3 hours in February, but bounced back to 34.5 hours in March again. Moreover, the household survey also struck a positive tone. The participation rate rose by two tenths to 63.2%, which left the unemployment rate steady at 6.7% despite the surge in household employment. As a result, markets scaled back their expectations for Fed rate hikes next year, based on the view that stronger labour supply could temper the pace of labour market tightening. This view was also reflected in a decline in Treasury yields. We maintain the view that the unemployment rate will continue to fall faster than the Fed is forecasting as we expect stronger economic growth and have a more pessimistic view on labour supply. This should set the scene for the start of Fed rate hikes from the middle of next year, with the policy rate rising to 1.5% by year end.