Draghi spoke out making clear there is no urgency to modify the guidance on monetary policy given the inertia of core inflation and wages……
Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy
Intesa Sanpaolo – Research Department For professional investors and advisers only
The minutes of the FOMC meeting held on 15 March as expected provided fresh information on the reinvestment policy. The central bank’s assessment of the macroeconomic picture remained positive. Participants were not concerned by the slowdown in GDP growth expected in 1Q, caused by temporary factors. Risks were considered “roughly balanced”, tied in part to fiscal stimulus, which in any case, according to the majority, should not reap effects before 2018. As for financial developments, financial conditions were considered still accommodative, and several participants stressed the role played by the stock market rally. In the discussion on monetary policy strategy, participants generally deemed it appropriate to hike rates gradually, so as to keep conditions accommodative, to allow inflation to reach and stably remain close to 2%. The expected path of gradual rate increases will in any case be reviewed based on the evolution of the scenario and of risks, both upside and downside.
For what concerns balance sheet policy, the Committee confirmed that asset purchases should remain an instrument to be used in exceptional cases, only after the margin allowed by interest rates cuts is exhausted. Participants agreed on the fact that the reduction in the Fed’s securities holdings should be gradual and predictable, and mostly accomplished by phasing out reinvestments (rather than through sales). In terms of timing, most participants believed it appropriate to consider changes to the reinvestment policy based on economic and financial conditions. “Several” participants said that the reduction in the size of the balance sheet should be based on a fed funds rate threshold, whereas others would prefer a more “qualitative” rule. Some recent speeches (for instance Dudley) indicated that the Fed may implement two hikes, and then take a “short pause” during which to start tapering reinvestments, before resuming hiking rates in 2018. Most participants stressed that the tapering of reinvestments should begin by the end of the year and be conducted in a “passive and predictable” manner, involving both Treasuries and MBS. For now, there is consensus on a gradual reduction of reinvestment purchases. In conclusion, the minutes have not changed the expectations built up over the past two weeks, pointing to two hikes (possibly June and September), followed by the start of a tapering of reinvestments in the autumn.
The minutes of the ECB March meeting confirm that Members discussed whether it was appropriate to change the guidance on rates and in particular to attenuate the easing bias by lifting the reference “to lower rates”. Members broadly agreed “that the easing bias was an integral part of the guidance” and that “changes in the formulation at the current juncture could lead to an undue upward shift in financial conditions to an extent that was not warranted by the prevailing outlook for price stability”. The minutes only confirm what has become evident in the past weeks: the debate on exit form unconventional measures has already started. Last Thursday, Draghi spoke out making clear there is no urgency to modify the guidance on monetary policy given the inertia of core inflation and wages. Draghi stressed that the monetary policy stance is the result of several instruments: negative rates, the APP which is time- and state-dependent, and the guidance. Our forward guidance is de facto on the entire package, not on any specific component of it. And this guidance relates not just to the conditions under which we would withdraw stimulus …but also to the sequence of measures. ” Draghi rejected criticism of the negative rate regime, indicating that on balance it is supportive not only for the whole economy but also for banks, as the drop in interest income is balanced by larger lending volumes. However, Draghi acknowledged that the probability of lower rates has decreased. The inertia of core inflation limits urgency to introducing changes to communication on monetary policy. However, if growth at more than solid rates continues in the coming months, it is reasonable to expect the ECB to start preparing the markets for a gradual normalisation of monetary policy.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.