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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
Yesterday's ECB announcement of an Expanded Asset Purchase Programme (EAPP) is unambiguously positive, in our view, in terms of the size and scope of purchases (including agencies and linkers, up to 30Y, until at least September 2016). The limitations that could potentially mitigate the market impact, including an attempt to reduce the degree of risk-sharing and the fact that capital keys favour large core countries, should not be overstated in our view.
Following months of speculation, the ECB is likely to announce a new broad-based asset-purchase programme on Thursday, which has the potential to surprise the market in various directions. The hope is that a compromise with the hawks on the degree of risk-sharing and moral hazard will allow for a more ambitious programme. The easiest and ‘cleanest' way to surprise would be with a flexible programme of at least EUR500bn, with more to come if needed.
Greece legislative elections are scheduled for January 25th after current coalition parties failed to secure enough votes to elect a new President in December. If elections are to mirror public opinion polls, then Greece far-left opposition party, Syriza, will be ahead of current coalition parties. Given Syriza economic program, confrontational negotiations on public debt are expected with the most likely scenario of longer maturities.
The combination of falling oil prices and a lower-than-expected TLTRO allotment is likely to trigger both contingencies for fresh ECB action, ie, a further deterioration in the inflation outlook as well as the inability of existing measures to expand the balance sheet by EUR1trn.
The ECB did not move closer to sovereign QE at today's meeting. In spite of another downward revision to growth and inflation staff projections, the ECB delivered nothing but some futile communication changes. Even the subtle shift from an "expectation" to an "intention" to expand the balance sheet could not be agreed unanimously.
An improving job market and stronger wage gains are expected to be the key driver of the housing recovery next year. We look for housing starts to rise to 1.13 million units in 2015 and 1.38 million in 2016. Mortgage lending standards remain very tight and an expected up-drift in mortgage interest rates as the economy improves will throttle the pace of the recovery. However, signs of easier mortgage financing for credit-worthy borrowers will help at the margin.
The Autumn Statement (to be published on 3 December) will likely reveal significant upward revisions to budget deficit forecasts mainly due to disappointing growth in receipts. Despite the deterioration in public deficit being mostly structural in our view, the government's fiscal mandate expressed in cyclically-adjusted terms would not be out of reach, although by a narrower margin.
In its November Inflation Report the BoE revised "materially lower" its projections for CPI inflation, thereby reinforcing the recent shift in market expectations for a later and more gradual path for monetary policy tightening than expected in August. The revisions have been prompted by a much weaker-than-expected actual CPI inflation and greater disinflationary forces coming from abroad.
The ECB has made a number of important dovish changes to its communication, thereby reaffirming its current strategy without any ambiguity. (1) The reference to a roughly EUR1tri balance sheet expansion target has been included in the introductory statement. (2) The ECB remains unanimous in its commitment to ease further if needed and has tasked its staff with “timely preparation” of such unconventional measures. (3) The Governing Council sees indications for downward revisions to staff forecasts in December.
To date, the impact of the CICE (Tax Credit for Competitiveness and Employment) has been patchy. The margin ratio of non-financial companies edged up slightly at the start of the year, but fell back in Q2, and investment continued to adjust. The chosen target range of salaries seems to be having a more pronounced impact on wages and employment than on profitability. The CICE is having a positive short-term effect, but the longer-term impact could be more finely-shaded than expected.
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