Global Daily – ECB focus now on credit easing?

by: Joost Beaumont , Jolien van den Ende , Bill Diviney

ECB View: Shift to private sector programmes seems persistent – The weekly figures of the Euro system’s net asset purchases showed that the shift towards the private sector programmes persisted last week. In total, the central bank purchased EUR 4.3bn of bonds on a net basis last week, which was only half of the total amount of purchases during the week before last (which was the first full trading week after the restart of QE). So far, the central bank has purchased EUR 13.4bn of bonds on a net basis, which leaves it well on track to service the EUR 40bn of net purchase-needs before it will take a break from 19 December onwards. The breakdown by type of programme showed that the shares of the covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP) were again significant, at 24% and 22%, respectively. Meanwhile, the share of the public sector purchase programme was 46%. Compared to last week’s figures, the share of the CBPP3 increased (was 13%), while that of the CSPP (was 31%) and the PSPP (was 50%) decreased. The big picture so far is that the shares of the private sector programmes has risen substantially versus their average share in net asset purchases in 2018 (was 7.5% for CBPP3, and 15.4% for CSPP), while the share of the PSPP has dropped from 76% in 2018 to around 48% now. It is still early days, but evidence is building that the ECB has shifted its focus for net asset purchases to the CBPP3 and CSPP and away from the PSPP. As already mentioned last week, this would provide strong support for these markets and suggests that the ECB is now more focused on easing credit conditions to the private sector directly. (Joost Beaumont)

Euro Rates: Net supply will still be negative in Germany and the Netherlands in 2020 – We estimated the gross and net bond supply for the euro area countries based on redemptions and the estimated budget for 2020 (European Economic Forecast- Autumn 2019). We will follow up with a detailed overview shortly, but here we give a short summary. The countries with a flattish net bond supply are Austria,  Ireland  and Portugal (each-1bn).  In addition, we expect a positive net bond supply for Spain (28bn), Italy (41bn), France (54bn) and Belgium (11bn). France and Italy already have a relatively large headroom in eligible bonds under APP-II. On the other hand, we estimate a negative bond supply for Germany of approximately EUR 21bn and for the Netherlands of EUR 7bn. Combined with the relatively low headroom in eligible bonds for Germany and the Netherlands, we expect that the issue(r) limit for Dutch bonds will be reached by the end of 2020. Furthermore, if the ECB will step up stimulus under our base scenario, then the issue(r) limit for bunds will also be reached in 2020. To continue APP-II we expect the ECB to buy relatively more OATS and BTPS. However, this scenario is based on a share of the PSPP in the overall APP of 76%, whereas recent purchase data – see above – hint at the prospect of a significantly lower share of the PSPP. This will give more room until PSPP limits for Germany and the Netherlands are reached. (Jolien van den Ende)

US Macro: Housing confidence stays elevated… – The NAHB homebuilder confidence index eased slightly to 70 in November from 71 in October, the first decline in the index in June. Indeed, housing has been one of the notable bright spots in the US economy over the past year, with homebuilder confidence back at elevated levels having declined significantly in late 2018. Anecdotal reports from the NAHB survey suggest a key driver has been the significant fall in mortgage rates, with the 30-year fixed rate having fallen more than 1pp since the end of last year to 4.0% as of November. This rise in confidence was finally reflected in the residential investment data for Q3, which showed 5.0% annualised growth following six consecutive quarters of contraction. We expect housing investment to continue recovering over the next few quarters, however labour market constraints are holding the sector back from growing more significantly.

…but don’t expect much of a growth boost – While the outlook for housing looks solid, this won’t provide much support for growth. As a share of GDP, housing investment is half the size it was back in the heady pre-crisis days, when it peaked at c.6% of GDP in 2005. Even in a very optimistic scenario of housing growing 10% annualised for the next few quarters (the fastest since 2013), it would add just 0.1pp to growth beyond what is in our baseline scenario (2.5%). While a stronger housing market is to be welcomed, then, it certainly cannot be relied upon to prevent the US economy slowing over the next few quarters. (Bill Diviney)