Global Daily – The demise of the PSPP

by: Kim Liu , Joost Beaumont , Shanawaz Bhimji , Aline Schuiling

ECB View: The demise of PSPP has already started – Since the start of the year, the ECB has lowered its monthly QE purchase amount from EUR 60bn to EUR 30bn. Now that the amount has been lowered, the ECB can also decide to alter the composition of purchases. Indeed, we expect that the slowdown will come merely at the expense of public sector purchases (assuming that the absolute amounts for the other programmes will remain stable). This is because of two reasons. Firstly, the ECB will avoid running into problems to find enough public sector bonds while still adhering to its self-imposed issue(r) limits. Secondly, a reduction of stimulus could lead to an unwarranted tightening of financial conditions. By focusing on covered and corporate bonds, the impact to the real economy will be mitigated. Assuming that the ECB will keep the purchase amounts under the CSPP and CBBP3 steady, and service the remainder of the monthly purchases with public sector bonds, we calculate that the ECB will reallocate in total EUR 106bn of QE purchases this year. This means that compared to a proportionate slowdown (in which the ECB would keep the relative size of each programme unchanged), the ECB would buy EUR 106bn less of public sector bonds, while buying EUR 43bn more of covered bonds and EUR 63bn more of credit bonds. In our view, the additional amount of money put to work in corporate and covered bonds would give substantial support in these already crowded markets. If we look at the most recent weekly purchase data, the first signs of a disproportionate slowdown in PSPP are becoming increasingly visible. While it is early days, we judge that the ECB will be able to maintain this new purchase pattern throughout 2018. (Kim Liu, Joost Beaumont and Shanawaz Bhimji) For more details, please see our Short Insight Publication ‘The demise of PSPP has already started’. If you are eligible to receive our Fixed Income and FX publications and want to be added to our mailing lists, please let us know.

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Euro macro: Eurozone composite PMI suggests even stronger growth into 2018 – The eurozone composite PMI increased from 58.1 in December to 58.6 in January, which was slightly above the consensus forecast. The composite PMI is a weighted average of the manufacturing and the services sector PMIs. The manufacturing PMI declined in January (by a full point to 59.6), with both the component that measures the level of output in manufacturing as well as the component that gauges the level of new orders falling. The sharpest drop within the manufacturing survey was in the indicator for new export orders, which declined by almost two points. That said, despite its decline in January the new export orders indicator has remained at a historically high level that is consistent with strong output growth in the coming months. In contrast to the manufacturing PMI, the eurozone’s services sector PMI increased in January (up from 56.6 in December to 57.6 in January). The services activity index and the new business component increased noticeably in January. The arise in the composite PMI in January means that the eurozone economy started 2018 on a strong note. Indeed, it suggests that GDP growth strengthened in 2017Q4-2018Q1 compared to the 0.7% qoq growth that was recorded in Q3 (recently revised up from 0.6%). (Aline Schuiling)