Global Daily – Draghi’s trillion euro target revisited

by: Nick Kounis , Maritza Cabezas

Global-Daily-Insight-10-September-2014.pdf ()
  • ECB President Draghi’s comments signal an increase in assets of EUR 670 – 950bn…
  • …the increase will probably fall short of the upper bound but will still likely be impressive
  • US small business optimism improves, in a sign of broadening recovery

Draghi’s ‘target’ is in a EUR 670 – 950bn range…

One of the key headlines from President Mario Draghi’s remarks in the press conference last week, was that the central bank was aiming to expand its balance sheet by around one trillion euros. That impressed initially, but over recent days financial market participants have been reflecting on the comments and their implications. To start with, there is some uncertainty about the amount that is being referred to. In the Q&A Mr Draghi said that one of the aims of the policy measures that had been announced was “to steer, significantly steer, the size of our balance sheet towards the dimensions it used to have at the beginning of 2012”. The ECB’s balance sheet total currently stands at EUR 2012 bn. In January of 2012, it stood at EUR 2682 bn, though by March it had climbed to EUR 2964 bn. So depending on how it is defined, the total increase would be between EUR 670 bn and EUR 950bn.


…it might be difficult to meet but balance sheet expansion will still likely exceed the Fed’s QE-2

The next question is how realistic is it that the ECB can achieve such an increase in its balance sheet given the measures announced. It looks rather challenging to us. We think the combination of the ABS and covered bond purchases would probably not exceed EUR 150 bn, and even that is pushing it given the size and liquidity of these markets. Meanwhile, even taking the top end of the ECB’s estimates for TLTRO take-up, the net increase in ECB lending is unlikely to exceed EUR 600bn. This is because some of the funds will be used to repay LTROs. This means we are unlikely to get close to the EUR 950bn number, though balance sheet expansion would nevertheless be relatively large. For instance, it could conceivably exceed the size of the Fed’s QE-2. Relative to the size of the eurozone, that would equate to EUR 400bn. The final question is whether, if the ECB fails to match the signalled balance sheet expansion, it would announce new measures. We think that this depends crucially on the circumstances. If the economy resumes a gradually recovery trend, and inflation bottoms out and starts to drift up next year, we think the central bank will most likely not feel the need to put forward fresh measures. This is our base case. If the data disappoint, it will likely boost the size of its asset purchase programme by adding asset classes, though the hurdle for government bond buys remains high.


US small business optimism up and job openings hold near 13-year high

The NFIB business optimism survey, based on a random sample of 598 small business owners, edged higher to 96.1 in August from 95.7 in July. More owners said that current conditions had improved, but still were somewhat cautious about the expectations of the economy in the coming months. Positive sentiment among small business is important for the labour market. A study published by the US Census Bureau shows that the bulk of net new jobs are generated by firms with less than 20 employees. Meanwhile, July’s Job Openings and Labour Turnover Survey was also released yesterday. It has acquired significance as a complementary measure of labour market slack. It showed that the number of job openings in July was practically unchanged at 4.673 million compared to the previous month, but is still up 22% relative to a year-ago levels. Job openings in areas such as manufacturing and retail, which were weaker in last Friday’s job report, remained strong. The other measures in the report remained unchanged. Hiring – one of the monthly “Yellen indicators” of the health of the labour market – was 3.5% of nonfarm employment. The separation rate remained at 3.3% of employment, while the number of job market quits, was 1.8% of employment. We think that the Fed’s view on the labour market outlook will remain unchanged in the next meeting.  However, over the next few months we see it become increasingly more positive.