Summary:

• ‍ECB QT is proceeding according to plan. I do not see the ECB ending QT anytime soon. As a matter of fact, I expect bond roll-offs to continue full stop next year. Bank reserve ratios in the Eurozone can drop to levels that would make the Federal Reserve blush;‍
• The decline in excess bank reserves that I forecast, will lead to further gradual increases in money market spreads: ESTR-DFR; GC-repo DFR; and BOR-OIS. At the aggregate level, reserves will stay ample;‍
• Caveats apply, and I keep a sharp eye on developments in individual member states. Because of Russia’s frozen foreign assets, Belgium has become a liquidity sink. Euroclear has drained close to 150 billion euros in reserves from the Eurozone banking system, though that doesn’t seem to affect money markets. More importantly, Belgium is no black hole (really!);‍
• French banks are out of the picture – for now at least. France could come back to haunt us if Parliament does not pass the austerity-lite budget for 2026. This goes without saying. Regardless, the Target2 position of the Bank of France remains precarious;‍
• Italian banks have increased reserves substantially in October – most likely by secured borrowing from foreigners. There is outright demand for reserves in Italy, clearly;‍
• German banks have substantially increased their footprint in the secured market. However, unlike Italy, the driving force very likely is not outright demand for reserves;‍
• As I have warned many times, liquidity accidents and problems in individual member states could force the ECB to end QT (much) earlier than expected. The postal code problem won’t go away.