Viewpoint: The ECB unanimously believes it is too early to start discussing an exit strategy

The May meeting of the ECB came to an end with stable rates, no developments in terms of non-conventional measures, and a broadly unchanged (slightly more dovish) rhetoric……

For professional investors and advisers only

The ECB unanimously believes it is too early to start discussing an exit strategy, while on the other hand it seems to have few tools in its bag with which to ease market tensions. US labor market: weak employment, falling unemployment.
In the press conference, Mr. Draghi said that the Governing Council did not discuss an interest rate cut, and that monetary policy stance remains accommodative, as nominal rates are low, real rates are negative, and liquidity is abundant. Draghi did not make any particular remark about the future use of the SMP, and simply commented that the programme is still in place, but is temporary by nature. The ECB confirmed its central scenario, based on which economic activity is stabilising at modest levels, with downside risks to the economic outlook still in place (mostly tied to the development of the debt crisis); according to Draghi, April data (mostly characterised by a sharp drop of PMI indices) are not sufficient to alter the scenario, which may only be assessed more accurately next month. According to Draghi, uncertainty on the scenario is higher than a month ago. Inflation risks are viewed as balanced, and upside and downside risks on the inflation outlook are considered with the same importance whereas a month ago there was an accent on short term upside risks coming from energy.
Draghi let on that the ECB, before deciding whether to launch a new round of LTROs, is waiting to assess the effects of the latest auction (settled on 1st March), and the latest developments on credit trends in particular. To sum up, the conference did not bring any substantial change in monetary policy stance, but the tone seemed to us slightly more dovish than a month ago, regarding risks to both the economic and the inflation outlook. In short, going forward, we think interest rates may stay put in the foreseeable future. The ECB may opt to bring down slightly the deposit rate, in order to discourage the “parking” of funds with the central bank, but a majority vote on this issue within the Council should not be taken for granted (on the other hand, cutting the refi rate could have little or no effect on the economic cycle in the current phase). We believe the full allotment regime will be left in place not only in the next quarter (to be announced at the June meeting) but probably until early 2013. The only tools the ECB seems to have in its bag are new 36-month LTROs and further asset purchases. However, the central bank seems reluctant to use any of them, and could be prompted to do so only in the event of a further, significant rise in financial tensions.
The April Employment Report confirmed the slowdown in job creation, compared to December-February (250k). Non-farm payrolls increased by 115k, and the figures for the previous two months were revised upwards by +54k. In the manufacturing sector, jobs increased by 16k, falling short of the average over the previous four months (37k); job growth was negative in the construction sector for the third month in a row (-2k), after a string of inflated monthly changes thanks to favourable weather conditions. Private service jobs increased by 116k, vs. +128k in March, falling short of the average for the November-February period (180k). The public sector shed jobs again, with a -15k decline. The household survey pointed to a new drop in employment (-169k), from -31k in March, marking a correction following an average growth of 450k between December and February. The labor force contracted by 342k, and the participation rate was at a 30-year low of 63.6%. Therefore, the unemployment rate dropped further, to 8.1%. The unemployment rate including discouraged workers and workers with parttime jobs for economic reasons, was stable at 14.5%. Hourly wages were unchanged (1.8% y/y) and hours worked increased modestly (+0.1% m/m). On the whole, data are mixed and confirm a modest employment trend, consistent with GDP growth between 2% and 2.5%. The ongoing decline in the participation rate makes life hard for the Fed’s decisions. The central bank will stay on the sidelines, waiting to assess the labour market outlook for a few more months.


Analyst Certification
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.

Important Disclosures
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 (
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).

Valuation Methodology

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 ( or by contacting your sales representative.

Source: BONDWorld – Intesa Sanpaolo – Research Department