June ECB Meeting
The ECB left rates unchanged at today’s meeting but revised its forward guidance. Rates will likely remain at present levels at least through the first half of 2020, an extension on previous guidance to the end of 2019. Regarding TLTRO III (targeted longer-term refinancing operations), new bank loans will be +10bps higher than the main rate.
On a slightly more hawkish note, the ECB did not qualify its guidance on rates by adding “or lower”, as expected.
During the press conference, Draghi unsurprisingly confirmed that risks to the euro area were tilted to the downside. Interestingly, the ECB revised both growth and inflation forecasts higher for this year. It sees 2019 GDP moving from 1.1% to 1.2%; 2020 GDP, from 1.6% to 1.4% and 2021, from 1.5% to 1.4%. Inflation forecasts for this year moved to 1.3% from 1.2%, 2020, from 1.5% to 1.4% while 2021 was left unchanged.
Draghi said that the probability of a recession was low and that there were no threats of derailing inflation expectations. He also confirmed that some officials raised the possibility of rate cuts.
Following the rate announcement, the euro saw some choppy price action but is trading better bid, rates are a touch higher and European equities retreated from their intraday highs.
During the press conference, these moves extended further as the near-term outlook, notably around growth and inflation forecasts, was a positive surprise for the market.
The market impact is not surprising given the dovish expectations and positioning going into the meeting. However, what we find interesting is that good news seems to be bad news for the market. A clear illustration of this was when Draghi mentioned that the risk of a recession was low, prompting the equity market to retreat further. This also highlights the significant influence central banks have had on the market since the beginning of the year.
Asset Allocation Consequences
Today’s ECB meeting is yet another confirmation that central banks are making steps towards further accommodation rather than tightening.
Last year, the macro picture was deteriorating while the geopolitical landscape was improving; today we are witnessing the opposite. Macroeconomic conditions as monitored by our Growth Nowcasters seem to be stabilising for now, however we note that dispersion is high with clear outperformance in the US while the Eurozone remains weak. It therefore seems that central bank dovishness is currently driven by geopolitics and their willingness to be pre-emptive rather than reactive to maintain growth momentum. This was confirmed by the Reserve Bank of Australia at their last meeting and recent comments by US Federal Reserve speakers.
Our medium-term view remains cautious. Given the recent stabilisation in the macro picture and inflation not posing any threats at this stage, we remain long growth assets but with hedges. The recently escalating trade war has impacted sentiment and raises serious questions on the effect it could have on global growth, making protection warranted.
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