UBS: ECB: Draghi trying to keep the hawks at bay

He stressed that the recoveryin inflation needs to be broad-based (for the whole Eurozone, and not just individual countries, such as Germany), sustainable (not just driven by temporary base effects related to energy) and self-sustained (i.e. sustainable even when super-accommodative monetary policy has ended).

Call unchanged: ECB to start tapering in Jan 2018, wind down QE by end-2018

Despite the good data recently, our ECB call remains unchanged: We expect the ECB to conduct monthly asset purchases of €60bn per month from April to December 2017, in line with the Bank's decision from 8 December. As of January 2018, however, we expect the ECB to start tapering and wind down its asset purchases over 12 months, i.e. until December 2018, with a decision due possibly as early as 7 September, or 14 December at the latest. With inflation likely to rise further over the coming months, we think the monetary policy discussion will turn more hawkish, not least in the context of the upcoming elections in Germany.

Rates Strategy: underwhelming details on sub-depo purchases

As widely expected the ECB did not alter its monetary policy stance. The sound forward guidance was retained and any signs of "hawkish" nuances, reflecting better data and improving market-based inflation expectations, were nowhere to be seen. The ECB's details for APP purchases below the deposit rate did not provide a lot of transparency. A focus on the PSPP should have been expected, while it confirms that, on aggregate, shorter Bund PSPP purchases will not be very drastically skewed to the front-end. We stick to our established recommendations of US vs German real rate spread tighteners, and regression-weighted 10y Bund breakeven (EUR ILS) tighteners. Moreover, in our view, the back-up in front-end Eonia forward rates provides attractive entry levels, we hold on to 5s30s Bund steepeners and recommend to scale into 10y Bund ASW wideners on further tightening.

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