Global Daily – What is priced in for the ECB?

by: Nick Kounis , Aline Schuiling , Bill Diviney

ECB View: Growth downgrades and dovish shifts can move markets – At the coming ECB meetings we expect the ECB to downgrade its expectations for economic growth, change its guidance to signal policy rates will remain on hold this year and extend its TLTRO programme. We think such moves can still surprise compared to what is being factored in by the consensus of analysts as well as financial market pricing. To begin with the economy, the ECB expects economic growth of 1.7% this year. The consensus of analysts stands at 1.5%, implying that the consensus is for moderate downward revisions in the economic growth outlook by the central bank. However, we think that there is much further weakness in the economy already in train (even though we expect the negative momentum to stabilise going forward – see below). Indeed, our forecast for GDP growth in the eurozone for this year is 1.1%. As for interest rates, the consensus of analysts expects the deposit rate to be 20bp higher by the end of this year. This is more aggressive than current market pricing. A full rate hike is not priced in until March/April 202. However, markets are still pricing in a significant chance of an end 2019 move. We therefore judge that the combination of downgrades to economic growth and the change in forward guidance can still put downward pressure on German 5y and 10y yields, and flatten curves. Finally, action on the TLTROs is now the market consensus, with 89% of respondents expecting a policy change according to the most recent Bloomberg ECB Poll. Like us, most analysts expect the announcement at the March meeting. As for tomorrow’s meeting, we do not expect the forward guidance to change yet or any movement in the macro projections (as they are updated next in March). The big change we expect is a shift in the assessment in the balance of risks to the outlook, which we think the ECB will state are now on the downside. This should be supportive of core government bonds and should see a flattening of the yield curve (2s5s and 2s10s). (Nick Kounis)

Euro Macro: Eurozone confidence shows early signs of stabilisation – A number of confidence indicators for the month of January were published in the eurozone these past few days. They all paint a picture of confidence stabilising after it dropped sharply in the final months of 2018. To begin with, Germany’s ZEW economic sentiment rose from -17.5 in December to -15 in January. Considering that the series moves in a range from -100 to +100, this rise was relatively modest. Moreover, it kept the indicator below its September 2018 level and also well below its long-term average value of 22. Next, France’s business climate indicator for the manufacturing sector as measured by the INSEE stabilised at 103 in January. At this level it is somewhat above its long-term average value of 100, but well below the level of September 2018 (of 107). Finally, the flash estimate for consumer sentiment in the eurozone was published. It picked up a bit in January (to -7.9, up from -8.3 in December). Similar to France’s business climate indicator, it is above its long-term average value (-11), but below the September 2018 level (of -6). All in all, we think the abovementioned confidence indicators are in line with our view that the weakness in the eurozone economy that began in 2018Q3 continued moving into 2019, with GDP growth stuck below the trend rate. However, they also present some early evidence that most of the slowdown is behind us.  (Aline Schuiling)

UK Politics: Opinion polling still tight, but momentum is against Brexit – As another referendum on EU membership becomes more likely, market focus on opinion polling will increase. In June 2016, the UK voted by 52% to 48% to leave the EU. While opinion polling in the run up to the vote had pointed to a Remain win, the polls were usually well within the margin of error, which explains how Leave ultimately came out on top. Similarly, current polling on EU membership remains tight, although it has shifted towards Remain particularly since it became clear what PM May’s Brexit deal would entail. For most of 2018, Remain had an average 4 point lead, ranging from 0-6 points ahead. Since November, the polling lead has increased to 6 points on average, with polling leads of as much as 8 points in recent weeks. While momentum behind Remain has clearly increased – corroborated by other polling which shows Leavers are having more regrets over their vote – we note that such polling leads were also evident in the run up to the last referendum. As such, a Remain victory in a new referendum is by no means a foregone conclusion, and much would still depend on how the respective campaigns are managed. (Bill Diviney)