ECB Preview: Draghi To Address Greece, China, Reiterate QE Commitment in “Holding Pattern” Presser

ECB Preview: Draghi To Address Greece, China, Reiterate QE Commitment in “Holding Pattern” Presser

Tyler Durden’s pictureSubmitted by Tyler Durden on 07/16/2015 07:33 -0400

By all accounts, Mario Draghi should remain “largely on message” in Thursday’s ECB presser, with the deal struck in Brussels last weekend having spared him the inconvenience of convening a tense discussion about imminent Grexit.

Draghi (who may or may not have personally helped orchestrate the currency swaps with Goldman in 2001 that are largely responsible for Greece’s current predicament) should reiterate the central bank’s commitment to implement PSPP in full and the market will no doubt be looking for any color the ECB cares to add about the event risks surrounding the implementation of a third Greek program and the recent turmoil in Chinese equity markets.

Wildcards for today’s press conference include: completely unexpected, market destabilizing commentary about persistent volatility and of course, glitter.

More from the sellside below.

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Deutsche Bank:

Thursday should be a holding-pattern press conference with Mario Draghi largely repeating the policy message from the last meeting, that is, that the ECB is fully committed to its QE programme through to September 2016 and the risks are tilted to more QE, not less.

There is some potential for a mildly more dovish message on inflation given the decline in oil prices over the last couple of months, but this should not affect the medium-term view. We would be a little less surprised by this than a more positive message on the recovery.

The first message we would expect is a repeat of the Council’s “prudent optimism” on the economic recovery and the chances of inflation returning sustainably to target in the medium-term. Once again, this guarded optimism will be predicated on full implementation of the QE plan through to September 2016. The improvement in the pace of GDP growth and the return to positive inflation this year does not question the need for QE in the mind of the Council. Rather, it justifies the decision to implement QE.

The second message we expect to hear in the press conference is caution. The ECB is at pains to remind the markets that there are still downside risks to growth, in particular because of the debt overhang, the uneven and slow pace of structural reforms and risks of disappointing external demand. China might be mentioned as a risk, indirectly via external demand and geopolitical risks. Likewise, on inflation the ECB acknowledges the role played by external factors including the weaker currency in pushing inflation forecasts and inflation expectations higher. This leave questions about the extent of domestic inflationary pressures. The ECB wants to “monitor closely” domestic inflation, e.g. wages. The ECB claims that core inflation has largely moved sideways at around 1.25% since 2010. Non-core, and hence erratic, items have dominated the movements in inflation. The renewed declining in oil prices falls highlights a concern, but this should not affect the medium-term view. Expect Draghi to repeat the message that it is too early to declare success in beating the downside inflation risks.

The third message we expect to hear is that despite the recent increase in sovereign yields, monetary conditions remain accommodative. The surprise for markets last month was Draghi’s message that they should get used to higher volatility. The ECB considers an increase in fixed income volatility to be normal following the introduction of a QE programme. What the ECB needs to do is separate what is a warranted tightening of financial conditions from an unwarranted tightening. This is no easy task, but both Mario Draghi and Peter Praet have since last month’s Council meeting talked about the decline in bank borrowing rates. This decline continues despite the market selloff. Since the ECB is dealing with a mainly bank-based rather than a market-based financial system, falling bank borrowing rates are critically important to the ECB conclusion that monetary conditions remain accommodative. The last ECB minutes make a point about “pipeline effects”, meaning the slow benefits accruing to the real economy from the rolling over of debts at increasingly lower interest rates. The ECB is using this “longer perspective” to keep policy calm through market volatility.


Waiting for September The ECB faces a complicated challenge. We have argued the tightening in monetary conditions (clearly unwanted) and the Greek saga leave the ECB with its finger on the trigger. Risks surrounding China certainly add to the dovish bias. But economic data remain strong and inflation data is behaving as the ECB forecast.

We still think that without a Greek shock, the central bank will want to wait before acting to see if the bond market turmoil affects ‘final’ interest rates, ie, the cost of borrowing for non-financial private agents, and whether technical factors throughout the summer correct some of the recent increase in real interest rates. Still, the ECB needs to sound dovish enough next week to ‘help the market’ get there. If the week delivers a ‘Greek shock’ that calls for immediate action (unlikely at this point), we would expect it to be concentrated in the periphery.

We remain bullish rates overall, with negative net issuance likely to be supported by Draghi’s dovish tone. The very large cash balances that appear to be building globally may also help the constructive bias, particularly heading into a period of low seasonal Euro govie issuance. In the FX space, we expect limited sustained impact with Monday’s Greek deal placing the emphasis on fundamentals once more.


The ECB will hold its regular monetary policy meeting and press conference today. We do not expect any policy announcement, but the Governing Council is likely to re-iterate its commitment to fully implement its asset purchase programme at least until September 2016, and “until we see a sustained adjustment path of inflation that is consistent with (the) aim of achieving inflation rates below but close to 2% over the medium-term”. Moreover, we believe President Draghi is likely to add that the Governing Council stands ready to deploy additional tools and ease policy further if necessary, in particular if the resurgence of the Greek crisis threatens the ongoing economic recovery in the euro area.

The Q&A session is likely to focus on where Greece’s banking sector is currently under stress as a result of a dramatic worsening of its liquidity position. The Eurosystem is currently the main source of funding for Greek banks and President Draghi will likely have to answer questions about the ECB’s approach to the continuation of the provision of liquidity through ELA.

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