Global Daily – Changes to our ECB base case and market pricing

by: Nick Kounis , Aline Schuiling

ECB View: Stimulus now seen coming in June rather than March – We remain of the view that the ECB will announce additional stimulus in the coming months as economic growth and inflation will likely disappoint ECB expectations. However, we now expect a package to be announced in June rather than the upcoming meeting in March. This is because ECB officials have signalled that it is too early to make a judgement about whether the medium-term outlook has changed in the face of the economic shock related to the spread of the coronavirus. Most recently today, ECB Executive Board member Isabel Schnabel asserted that the Governing Council ‘really still have to first get more clarity about the medium term implications before we can even discuss what we can actually do’. ECB Chief Economist Philip Lane made similar remarks a few days ago. We expect the ECB to cut its deposit rate by 10bp, announce a step up of net asset purchases to EUR 40bn and increase the maturity of TLTRO loans by another year at the June Governing Council meeting. (Nick Kounis & Aline Schuiling)

Global Rates: Markets move to price in monetary easing – Markets on both sides of the Atlantic have aggressively moved to price in monetary easing over the last few days. A full 10bp ECB rate cut is now priced in for the July meeting, while a week ago, only a 60% chance of a cut was priced in by the end of this year. This is only a little later than our updated base case for the ECB (see above).

While markets have long priced some degree of easing by the Fed, until recently much of this was priced to occur later in the year and was to a limited extent (around one and a half cuts by December). In just the past week, however, markets have come around to fully pricing a cut as soon as April, two cuts by June, and three cuts by the end of 2020 – all of this driven by concerns over the coronavirus fallout. There remains much uncertainty over how far the coronavirus outbreak will escalate, but what is becoming clear is that efforts by governments to contain it are by themselves having a material impact on economic activity. The US government has yet to implement measures quite as severe as those affecting Asia and parts of Europe, but the economy will no doubt be affected by the reduced trade and tourism that results from measures taken elsewhere. As the impact on growth becomes more tangible, our view is that the Fed will implement a rate cut in Q2, and the increasing downside risks to growth suggest that such a cut is likely to come sooner rather than later. (Bill Diviney & Nick Kounis)