07.10 Weekly Viewpoint : ECB’s Constancio denied talks of tapering

Euro Area. ECB’s Constancio denied talks of tapering, but the minutes of the September meeting confirm the Council did not discuss either an extension of the APP beyond March 2017. All options remain open but future moves are still data dependant……

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United States. The September Employment Report supports the probability of a fed funds rate hike soon.

In the middle of this week, press leaked talks of a tapering of ECB purchases starting in March next year. ECB’s Vice President denied discussion within the Council on exit strategies last Thursday. Indeed, markets were little impressed by the rumours and certainly no tantrum was triggered. The minutes of the September meeting, and the statements made by Praet, leave little doubt on the fact that the ECB is aware that it must guarantee current ultra-accommodative financial conditions for the foreseeable future, as a return of inflation towards 1.5% will largely depend on the trend of domestic prices, and therefore on the resilience of domestic demand.

If there has been no talk of tapering, the ECB did not discuss either an extension of the programme to beyond March 2017. The meeting accounts confirm that for the time being the Council has only set up working groups to assess which changes would allow to programme to be continued in an orderly manner, as “ the present constellation of interest rates is posing increasing challenges to implementation in the future ”. The accounts indicate that all the options remain open, but that much will depend on the trend of inflation in services sector, typically more tied to the trend of domestic demand and wages, as well as on the evolution of credit aggregates. In our view, between now and December data should remain compatible with Consensus forecasts of a slowdown of the euro area cycle to 1.3% in 2017, from 1.5% this year, rather than with the ECB’s expectations for a stabilisation of GDP growth at rates (1.6%) above potential. In this case, the ECB would find itself having to keep monetary stimulus unchanged for a few more months, as even a very gradual tapering of purchases beyond March 2017 would imply a tightening of financial conditions. In light of Coeuré’s reference to yields conditions that challenge the orderly functioning of the programme, the ECB will likely remove the limit to purchase binds with a yield above the depo rate. However, this measure will not be sufficient to make up for the shortage of German paper. As we have repeatedly observed, in order to extend the programme until June 2017 and beyond, and in general to secure the credibility of QE and of the statements made by Council members on the ECB’s ability to act if needed, most recently by Praet’s, changes should be introduced at least to the single issuer, single ISIN limits and announcements could arrive already in December. We doubt that consensus will gel on making changes to the capital keys rule already by the end of the year.

In the United States, September macroeconomic data have been encouraging and in line with on-going moderate growth, with labour market now at full-employment and a gradual uptrend of inflation. The September Employment Report is in line with this picture. Non-farm payrolls increased by 156k, from 167k in August. The two previous months’ readings were revised by 4k. Private services remain on a solid trend (+157k), in line with the recent average, construction jobs are up by 23k, manufacturing and public sector jobs are down by 13k and 11k respectively. Household employment is up by a solid 354k, with labor force stronger by 444k. As a result, The unemployment rate increased to 5% from 4.9% in August, with participation at 62.9% after two months at 62.8%. Hourly wages accelerated to +0.2% m/m (2.6% y/y) and hours worked were up by a strong 0.4% m/m. Employment and labor force data signal further improvement of the labour market, hours worked and wages point to strong income and output in September. The case for a rate hike “sooner rather than later” is getting stronger. 


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