UBS: ECB: What should we expect this week?

Following the ECB's big decision, on 8 December, to extend QE from April to December 2017, with monthly asset purchases of €60bn, we do not expect new policy initiatives or major new guidance from the ECB in its upcoming meeting on 19 January.

16.01.2017 | 13:47 Uhr

Despite upbeat data recently, ECB President Draghi will likely argue that the focus is now on the implementation of the previously announced measures. The release of the accounts of the December meeting indicated that the discussion in the Governing Council about an extension of QE was more controversial than perhaps previously thought.

Expect discussion on growth and inflation outlook

We expect the ECB press conference to focus on: a) the surprisingly firm Eurozone PMIs and the pick-up in inflation in December and their likely implications for the monetary policy outlook; b) ongoing efforts to address the challenges in the Italian banking sector; c) the outcome of the ECB's new Bank Lending Survey, which will be released on 17 January, as well as; d) the implications of potential changes in US economic policy on Europe and the ECB monetary policy.

We project the ECB to run down QE purchases during 2018

Our base case scenario remains that the ECB will run its QE programme until December 2017, as pre-announced on 8 December, but start tapering as of January 2018, to wind down its asset purchases over the course of perhaps 12 months. Under this scenario, the ECB's tapering decision could come as early as 7 September, or 14 December at the latest. Our call is based on inflation rising to an average 1.8% in 2018E, not least driven by an ongoing recovery in oil prices. We reiterate, however, that deviations in oil prices from our central scenario would imply potentially significant two-way risk to our inflation projections and hence to our monetary policy forecasts (Eurozone inflation under different oil prices, 13 December 2016).

Rates Strategy: Focus on "hawkish" nuances and QE implementation

As we do not expect tangible action from the ECB this week, the focus is likely to be on nuances in the communication. Market pricing implies an ideal scenario for the ECB with inflation expectations rising and real rates falling (having decoupled from the US) which is supporting financial conditions for the real economy and therefore equities. However, the decoupling of US real rates from EGB peers seems to have reached its limits, while the rise in euro area inflation expectations looks stretched against rates. The PSPP Legal Act clears sub deposit rate purchases and the German front-end should find support from an outright as well as an ASW (curve) perspective over the near-term.

In general, ultra-long Bund should remain the weakest link on the curve (we stick to steepeners), German ASW should remain structurally wide and we recommend using tightening to scale into wideners. 

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