20.07.2022 -
Statements:
„Wir gehen von einer Anhebung um 25 Basispunkte aus, die gut angekündigt und von den Märkten konsequent eingepreist wird. In Anbetracht der jüngsten aggressiven Kommunikation, der jüngsten starken (Kern)Inflationsdaten sowie der in den letzten Wochen stark gestiegenen Gaspreise ist eine Anhebung um 50 Basispunkte nicht völlig auszuschließen.“
„Es ist unwahrscheinlich, dass die Zinsprognose wesentlich geändert wird, was auf eine größere Anhebung als 25 Basispunkte in den kommenden Sitzungen hindeutet.“
„In der Tat könnte eine Anhebung um 50 Basispunkte im September (und möglicherweise danach) ein Minimum sein.“
„Der Anti-Fragmentierung-Mechanismus ist eine unabdingbare Voraussetzung dafür, dass die Europäische Zentralbank (EZB) die Zinsen erhöht, möglicherweise schneller als vom Markt erwartet.“
„Es ist unwahrscheinlich, dass der Anti-Fragmentierung-Mechanismus im Falle einer politischen Krise eingesetzt wird.“
„Eine Kürzung der Gaslieferungen ist ein weiterer externer Angebotsschock, ähnlich dem Russland-Ukraine-Konflikt, der die Inflation in die Höhe treibt und auf den die EZB kurzfristig mit einer stärkeren Straffung der Politik reagieren müsste, um eine Entkopplung der Inflationserwartungen zu vermeiden. Das Mandat der EZB ist in dieser Hinsicht glasklar.“
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Kommentar
- Our baseline is for a +25bps rate hike at the July meeting. 50bps hike cannot be entirely ruled out but implies that a +25bps move will be a compromise, not resulting from strict unanimity. More interestingly, ECB likely to point to a higher than 25bps rate hike clips in upcoming meetings - possibly beyond September - depending on inflation outlook. Risk is that agreeing on a +25bps in July may result doing more than 50bps in September.
- Anti-fragmentation tool: “think OMT 2.0” at full discretion of the ECB. It may take a few meetings before fully understood by market participants. Sine qua none condition for a swift rate normalisation. Unlikely to come at the rescue of messy (Italian) politics.
- In case of gas supply cut, we think the ECB is likely to turn more hawkish, consistent with a faster hiking cycle (not to a higher terminal rate though).
First rate hike in eleven years: Our baseline is for a +25bps hike, well telegraphed and priced consistently by markets. Given latest hawkish communication, latest strong (core) inflation spot prints, as well as surging gas prices in recent weeks, a +50bps hike cannot be entirely ruled out. Though large upside market surprise on the rate front would probably need to come hand in hand with strong, convincing narrative/details on anti-fragmentation tool. Rate guidance unlikely to be changed materially pointing to a larger than 25bps hike in upcoming meetings (especially after May and June inflation upside surprises vs June ECB staff macro forecasts). In fact, doing +50bps in September (and possibly thereafter) may be a minimum. Recall our baseline until year-end: +25bps in July, +50bps in September, +50bps in October, +25bps in December = depo rate @ 1.0% at year-end.
Anti-fragmentation mechanism dubbed “Transmission Protection Mechanism” leaked by Bloomberg. Cannot emphasize enough the complexity of the technical, political and legal exercise.
- Its purpose:
- Avoid (periphery) funding rate increasing by more than the macro fundamentals would suggest (not to avoid higher rate altogether).
- Sine qua none condition for the ECB to hike, possibly faster than priced by market. Its philosophy is thus supported by both doves and hawks within Governing Council.
- Key details: Holistically is a OMT 2.0
- Backstop: Unlimited envelope (no explicit levels/targets). "Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits." (Schnabel, 14 June)
- Unlikely to be used in the case of political crisis OMT (Sovereign ask formally for help with an ESM programme).
- Conditionality: ECB based macro conditionality (For instance: Excessive Deficit Procedure + ECB’s own debt sustainability analysis + Recovery and Resilience Fund).
- Purchases to be sterilised: 1)/ buying peripheral bonds, while core would be sold, and/or 2) ECB could do reverse repos of 1w deposits, or even issue bills to drain the liquidity.
- How: Just like OMT, it may take a few (ad-hoc) meetings to be fully digested by market participants. Recall Draghi whatever it takes speech took place on 26 July 2012 (London), at 2 August 2012 Governing Council meeting, “the Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective”, technical features of OMT were published on 6 September 2012.
Increased ECB hawkish tone in case of gas supply cut = More than 50bps hike clip possible
- It is an another external supply shock, similar to the Russia-Ukraine conflict, pushing up inflation (expectations) to which ECB will have to respond by tightening policy more in the short-term to avoid a de-anchoring of inflation expectations, regardless of the activity outlook. ECB’s mandate is crystal clear on this.
- President Lagarde gave us a clue at Sintra: “Indeed, there are clearly conditions in which gradualism would not be appropriate. If, for example, we were to see higher inflation threatening to de-anchor inflation expectations, or signs of a more permanent loss of economic potential that limits resource availability, we would need to withdraw accommodation more promptly to stamp out the risk of a self-fulfilling spiral” (Lagarde speech in Sintra, 28 June 2022).
- Useful to refer to the severe macro scenario developed in the June ECB macroeconomic forecasts. “The scenario assumes a complete cut in Russian energy exports to the euro area starting from the third quarter of 2022, leading to a rationing of gas supplies…”
- “[…] If the events of the scenario materialise, governments may take additional action to cushion the impact of the stronger energy price hikes on consumers and firms and monetary policy may react.”
- No new news on EURUSD. Likely to be difficult to avoid any comments on the EURUSD in the Q&A. President Lagarde likely to use the usual language “look at it but not a policy target”. In our opinion, EURUSD breaking parity is remarkable but 1/ in nominal effective terms it has only depreciated c.5% in the past year, and 2/ imminent issue lies with gas which to a large extent is paid in EUR (although admitting significant share of LNG coming from the US), and 3/ European growth concerns likely reflect lower EUR, and as such rather tectonic shift, rather than reaching a previous technical level/range to which ECB usually reacts.
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