- We now see the ECB announcing a bigger and broader stimulus programme in January…
- …which will include government bonds and could possibly exceed a trillion euro
- Russian ruble continued to slide, despite aggressive CBR rate hike
- US consumers go to town signalling ongoing strong economic growth in Q4
TLTRO a peashooter rather than bazooka
The second TLTRO disappointed market expectations, with total borrowing of just EUR 129.8bn (consensus: EUR 148bn). It means that banks took up only around 50% of the maximum take-up of EUR 400bn over September and December. Given that there is EUR 270 bn of the 3-year LTROs maturing early next year, it means that the TLTROs will not lead to a major ECB balance sheet expansion.
Sovereign bond purchases on the cards
It now looks close to impossible for the ECB to achieve anywhere near a trillion euro balance sheet expansion with its existing measures. It will need to broaden asset purchases and sovereign bonds will need to be part of the mix. We previously thought that agency debt and corporate bonds would suffice.
Possibly even more than a trillion
Since the ECB first hinted at a trillion euro increase in its balance sheet in September, the outlook for inflation has deteriorated. At current oil prices, inflation would most likely decline to -0.3% yoy early next year from +0.3% yoy in the latest reading for November. Inflation will probably rise during the course of next year, but would be further away from 2% for even longer.
The very weak inflation trajectory over the coming months will raise concerns at the ECB of second round effects, where lower inflation expectations put downward pressure on wage growth and the inflation rates of other goods. Given the deterioration in the inflation outlook, there is a possibility that the ECB will signal that it intends to expand its balance sheet by more than a trillion.
Shock and awe in January
Overall, we expect the ECB to announce a broader and bigger programme of asset purchases at its January meeting. The inclusion of sovereign bonds and the possibility of more than a trillion euro expansion would be a combination that will allow the ECB to have a ‘shock and awe’ effect on markets.
Central Bank of Russia fails to stem slide in the ruble
At its latest meeting, the Central Bank of Russia (CBR) hiked rates by 100bp to 10.5%, though financial markets had been looking for an even more aggressive hike. Indeed, the CBR’s move did not stem the slide in the ruble. Strangely, in its press statement, the Board of Directors did not discuss any financial market issues, but we think that a stabilisation of the ruble will remain one of its main aims. This suggests that, unless oil prices recover sharply, more rate hikes are on the cards. As such, a tightening of financial conditions will be another headwind that Russia’s economy will need to battle, on top of inflation denting household as well as the government’s purchasing power, and uncertainty and capital outflows leaving their mark on investment. As such, we have reduced our 2015 GDP forecast for next year to -1%, from 0.5% earlier.
US retail sales see strongest jump in eight months
The November retail sales report adds to a string of positive data painting an upbeat picture of the US economy. Retail sales increased by 0.7% mom in November up from a revised 0.5% (previously 0.3%) in the previous month. This report should lift fourth quarter growth to around 3%,. Given this, and other strong recent reports, we think the Fed remains on track for a mid-2015 rate hike.