Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
You can access both of our platforms from a single Saxo account.
ECB Preview: Markets force Draghi into a dovish corner
Christopher Dembik
Head of Macroeconomic Research
Summary: The European Central Bank policy-setting meeting convenes in Vilnius today, and with a new chief economist on board, should we expect any big policy changes? Not this time. For a variety or reasons, the ECB will wait for the Fed to make the first move.
• Today’s ECB meeting is hosted by Lietuvos Bankas, in Vilnius, Lithuania. It is the first meeting with Philip Lane on the Executive Board, in his role as chief economist and successor of Peter Praet. Non-voters will include the Belgian Peter Wunsch, the Finnish Olli Rehn, the Slovak Jozef Makuch and the Dutch Klaas Knot (who opposes favourable TLTRO-III terms and tiering).
• We don’t expect major changes to the ECB staff projections. The euro area Q1 growth was rather solid, especially in Germany, but the latest PMI prints and confidence indicators confirm that the Q2 outlook is deteriorating as the trade war intensifies and the likelihood of a V-shaped global recovery is vanishing. However, the ECB will likely wait to assess the exact impact of external headwinds before adjusting its projection.
• As a first answer to market pressure, Draghi has no other option than to adopt a dovish tone and may announce details of the new TLTRO starting in September this year. So far, no details about the pricing have been communicated but we expect very favourable conditions in order to reassure investors. Hints at other instruments such as the reintroduction of lower in guidance or tiering are not on the table, especially considering that many governing council members who publicly advocated for compensation measures to banks in relation to negative deposit rate have recently changed their views.
• Market speculation about a rate cut is premature. It is more than obvious that there will be no rate hikes anytime soon, but there is no case for a rate cut in the euro area now. For that to happen, we need a combination of an export downturn and tightened financial conditions. We have the first one, but not the second one. In addition, it is likely that the ECB will wait for the Fed to act first and will then adjust its own monetary policy stance.
• The ECB needs to address the risk of de-anchoring of inflation expectations. In our view, the euro area’s main short-term issue is not related to growth but to low inflation expectations. The drop in inflation expectations have recently been dramatic, reaching historically low levels. The euro 5y5y inflation swaps is down to 1.28%. If this trend continues – potentially leading to de-anchoring, the only appropriate policy response would be QE.
• We don’t expect major changes to the ECB staff projections. The euro area Q1 growth was rather solid, especially in Germany, but the latest PMI prints and confidence indicators confirm that the Q2 outlook is deteriorating as the trade war intensifies and the likelihood of a V-shaped global recovery is vanishing. However, the ECB will likely wait to assess the exact impact of external headwinds before adjusting its projection.
• As a first answer to market pressure, Draghi has no other option than to adopt a dovish tone and may announce details of the new TLTRO starting in September this year. So far, no details about the pricing have been communicated but we expect very favourable conditions in order to reassure investors. Hints at other instruments such as the reintroduction of lower in guidance or tiering are not on the table, especially considering that many governing council members who publicly advocated for compensation measures to banks in relation to negative deposit rate have recently changed their views.
• Market speculation about a rate cut is premature. It is more than obvious that there will be no rate hikes anytime soon, but there is no case for a rate cut in the euro area now. For that to happen, we need a combination of an export downturn and tightened financial conditions. We have the first one, but not the second one. In addition, it is likely that the ECB will wait for the Fed to act first and will then adjust its own monetary policy stance.
• The ECB needs to address the risk of de-anchoring of inflation expectations. In our view, the euro area’s main short-term issue is not related to growth but to low inflation expectations. The drop in inflation expectations have recently been dramatic, reaching historically low levels. The euro 5y5y inflation swaps is down to 1.28%. If this trend continues – potentially leading to de-anchoring, the only appropriate policy response would be QE.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...