Comments on today’s ECB meeting and global fixed income themes from the Global Unconstrained Bond team….
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By Marilyn Watson Head of Global Fundamental Fixed Income Strategy
Today, the ECB released its new macroeconomic staff forecasts. While recent eurozone economic data continues to paint a positive picture for real GDP growth, with little or no discernible impact from the UK’s EU referendum decision thus far, the ECB does anticipate that there will eventually be an adverse trade impact to the economy. The outlook for 2016 GDP growth has been revised up to 1.7% but down for both 2017 and 2018 to 1.6% (from the June forecasts).
Meanwhile, the outlook for HICP inflation remains unchanged at 0.2% for 2016 and is slightly lower at 1.2% for 2017.
In terms of its monetary policy stance, as expected, the ECB maintained the deposit rate at -0.4%, the main refinancing rate at zero and the marginal lending facility at 0.25%. With HICP inflation currently running far closer to zero than to the central bank’s target of close to but below 2%, we expect the ECB to retain an easing monetary policy bias.
We believe that any future loosening is likely to be via other tools such as asset purchases rather than significant changes to key policy rates and had been looking for any hint during the press conference of an extension to the asset purchase programme, which is due to end in March 2017. Instead, President Draghi commented that new stimulus had not been discussed and re-emphasised the need for fiscal policy measures.
Interestingly, however, Draghi noted the “substantial amount of monetary support that is embedded in our staff projections” and that they would use all the instruments available to them if necessary. To us, this suggests that the base case is for an extension of the programme and we will look for clarification on this.
Among our positions in the single currency bloc, we remain long Italian inflation-linked bonds along with Portuguese and Greek government debt. In the corporate bond space, we retain the favourable view on select core subordinated European corporates and lower-tier 2 financials that we have held for some time. We believe that the ECB’s supportive monetary policy stance will continue to provide a beneficial backdrop for these bonds as well as the ongoing demand for yield.
The Bank of England’s Monetary Policy Committee meets next week (15th September) for the first time since cutting Bank Rate to 0.25% in August and announcing additional bond purchases, including corporate bonds. While we believe that they would be prepared to do more if necessary, hard economic data has held up relatively well since the referendum on the EU. As such, we will continue to follow economic data releases carefully as well as the impact of the new corporate bond and gilt purchases. We took profit on our long gilt positions following the QE announcement but have been tactically trading GBP.
The US Federal Reserve (Fed) and Bank of Japan (BoJ) will both announce any changes to their monetary policy stances on 21st Sept. Despite the huge amount of rhetoric before and during its Jackson Hole conference, the Fed still appears to be very much data dependent and our base case remains for gradual interest rate normalisation with one hike this year, most likely December.
We remain positioned overall long US duration. In this environment, we believe that along with select investment grade credit, securitised assets and some high yield debt, it continues to offer attractive risk-adjusted sources of carry.
Across the Pacific, the BoJ will announce the results of its comprehensive review of monetary policy. With inflation far below target, we expect the BoJ to remain on a loosening monetary policy stance for some time to come, although believe that further easing will likely focus on tools other than JGB purchases. We are currently positioned short or underweight the long end of the JGB curve.
Finally, we see idiosyncratic opportunities in emerging market rates and FX. Some of our strongest local bond market preferences are Indonesia, India, Mexico and Russia.