“DOVISH START, HAWKISH FINISH”

Cosimo Marasciulo, Head of European Fixed Income, Pioneer Investments’

1. Slightly More Dovish Opening Statement than Expected

Cosimo Marasciulo

The second line of the press release was more dovish than expected – “The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases”. There had been speculation that the phrase “or lower levels” would be dropped as a sacrifice at the altar of the ECB hawks. This dovish stance was further reinforced by the statement that should the outlook deteriorate, “…the Governing Council stands ready to increase the programme in terms of size and/or duration”. This is despite the fact that the ECB’s asset purchase programme will be reduced from it’s current pace of €80bn per month to €60bn a month, starting in April 2017.

2. “The Devil is in the Detail”

ECB President reminded us that the Governing Council will look through the (in their opinion) temporarily elevated headline inflation rate, and concentrate on the core number. In his press conference statement, Draghi again reaffirmed that the ECB see “no convincing upward trend in underlying inflation”. He then went on to note that the ECB “see no self-sustained inflation adjustment”, but that they are confident that progress will be made on the growth front, that slack will disappear and eventually wages will grow. The upwards revision to 2017 inflation is simply a recognition of the fact that recent inflation prints will mechanically push the 2017 average higher. The lack of any adjustment to the 2019 inflation forecast could be taken as another dovish factor.

3. Modest adjustments to the Staff Forecasts

The ECB staff forecasts for both GDP and inflation showed only minor upward adjustments (see table below). Draghi did acknowledge that the “balance of risks to growth has improved”

Sounding a bit like a broken record, Draghi went on to urge “other policy actors to contribute more decisively” and that “all Euro-area countries must step up efforts” to enact the structural reforms that the ECB (and ourselves) believe are so necessary to lift growth to a sustainably higher level. Good luck with that – in a year when some of the major players in the Euro-area are facing national elections ( France, Netherlands and Germany) that, according to opinion polls, are too close to call, no incumbent party has the will nor the inclination to introduce reforms. Indeed, Mr Schultz in Germany has even floated the idea of dismantling some of the Agenda 2010 reforms introduced by Chancellor Schroder.

4. More Hawkish when Answering Questions about Removing Lower-Rate Reference

Draghi did explain that the ECB council had a debate about whether it would be appropriate to remove the word “lower” from the forward guidance on rates. However, Draghi pointed out that since the council do not yet see a sustained improvement in the inflation rate, they decided to keep the guidance as it stands. He noted that the ECB’s rate guidance is “an expectation” and that the ECB will continue to monitor the outlook. But perhaps the most interestingly part of today’s proceedings was that Draghi appeared to dodge a reporter’s question as to whether the ECB can raise rates before QE ends. We have seen enough of Draghi’s press conferences now to know that if he didn’t answer the question, it’s because he wants to keep his options open. Therefore a hike in the deposit rate remains a possibility for late 2017.

5. Overall – Dovish Statement, Hawkish Press Conference

Overall it was a pretty boring statement and press conference, as evidenced by the fact that Draghi struggled at times to find parts of the speech he wanted to reference. We believe we saw a weakened forward guidance, even though markets were looking for something more hawkish. The ECB have kept the door open to hike the depo rate before QE ends – that fact alone will continue to keep bonds markets under pressure. We believe there was nothing in the statement or press conference to reverse the recent rise in bond yields. We still favour a short duration and curve-steepening bias in European sovereign bonds.

Cosimo Marasciulo, Head of European Fixed Income, Pioneer Investments’

1. Slightly More Dovish Opening Statement than Expected

Cosimo Marasciulo

The second line of the press release was more dovish than expected – “The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases”. There had been speculation that the phrase “or lower levels” would be dropped as a sacrifice at the altar of the ECB hawks. This dovish stance was further reinforced by the statement that should the outlook deteriorate, “…the Governing Council stands ready to increase the programme in terms of size and/or duration”. This is despite the fact that the ECB’s asset purchase programme will be reduced from it’s current pace of €80bn per month to €60bn a month, starting in April 2017.

2. “The Devil is in the Detail”

ECB President reminded us that the Governing Council will look through the (in their opinion) temporarily elevated headline inflation rate, and concentrate on the core number. In his press conference statement, Draghi again reaffirmed that the ECB see “no convincing upward trend in underlying inflation”. He then went on to note that the ECB “see no self-sustained inflation adjustment”, but that they are confident that progress will be made on the growth front, that slack will disappear and eventually wages will grow. The upwards revision to 2017 inflation is simply a recognition of the fact that recent inflation prints will mechanically push the 2017 average higher. The lack of any adjustment to the 2019 inflation forecast could be taken as another dovish factor.

3. Modest adjustments to the Staff Forecasts

The ECB staff forecasts for both GDP and inflation showed only minor upward adjustments (see table below). Draghi did acknowledge that the “balance of risks to growth has improved”

Sounding a bit like a broken record, Draghi went on to urge “other policy actors to contribute more decisively” and that “all Euro-area countries must step up efforts” to enact the structural reforms that the ECB (and ourselves) believe are so necessary to lift growth to a sustainably higher level. Good luck with that – in a year when some of the major players in the Euro-area are facing national elections ( France, Netherlands and Germany) that, according to opinion polls, are too close to call, no incumbent party has the will nor the inclination to introduce reforms. Indeed, Mr Schultz in Germany has even floated the idea of dismantling some of the Agenda 2010 reforms introduced by Chancellor Schroder.

4. More Hawkish when Answering Questions about Removing Lower-Rate Reference

Draghi did explain that the ECB council had a debate about whether it would be appropriate to remove the word “lower” from the forward guidance on rates. However, Draghi pointed out that since the council do not yet see a sustained improvement in the inflation rate, they decided to keep the guidance as it stands. He noted that the ECB’s rate guidance is “an expectation” and that the ECB will continue to monitor the outlook. But perhaps the most interestingly part of today’s proceedings was that Draghi appeared to dodge a reporter’s question as to whether the ECB can raise rates before QE ends. We have seen enough of Draghi’s press conferences now to know that if he didn’t answer the question, it’s because he wants to keep his options open. Therefore a hike in the deposit rate remains a possibility for late 2017.

5. Overall – Dovish Statement, Hawkish Press Conference

Overall it was a pretty boring statement and press conference, as evidenced by the fact that Draghi struggled at times to find parts of the speech he wanted to reference. We believe we saw a weakened forward guidance, even though markets were looking for something more hawkish. The ECB have kept the door open to hike the depo rate before QE ends – that fact alone will continue to keep bonds markets under pressure. We believe there was nothing in the statement or press conference to reverse the recent rise in bond yields. We still favour a short duration and curve-steepening bias in European sovereign bonds.