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The ECB’s new interest rate framework/the Italian problem
Summary • With sizeable TLTRO maturities this year and TLTRO-created reserves all but disappearing less than a year from now, reserves in the Italian banking system will fall to uncomfortably low levels before an acute shortage emerges in early 2024. Already next June, we estimate that the Liquidity Coverage Ratio of significant banks in Italy will fall by 50 percentage points By March 2024, it will be below 100. The ECB will judge this situation to be unwanted and unwarranted, forcing it to act. • The ECB will find itself at a crossroads by the coming summer. We see three options ranked in order of likelihood: • In the second half of 2023, the ECB will take a leaf out of Bank of England’s playbook. The ECB will align its deposit rate with its main borrowing rate, the MRO rate. This will allow the ECB to seamlessly cover both anticipated and unanticipated reserve shortfalls in parts of the Euro Area banking system while shrinking its balance sheet with Quantitative Tightening and TLTROs as they come due. More importantly, the ECB will prevent a bifurcation of money market rates between member states where bank reserves are relatively high and where they are relatively low. At the same time, the ECB will keep its operational framework simple and prevent US-like liquidity crunches; • Stick with the current framework, which will further fragment monetary policy transmission, but which will still prevent a liquidity crunch while preventing potential communication problems surrounding aligning the deposit rate with the MRO-rate; • A blast from the past: 1-week deposit tenders or their newer version: 1-week ECB certificates. The ECB would pay a heavy price for mopping up reserves where they are most plentiful: in the core Euro Area countries. The national central banks will experience increased operating losses, while risks of a US-like money market breakdown rise. • In each scenario, we see odds of the ECB instituting a standing facility for nonbanks as very, very remote. • Regardless, because of TLTRO repayments and Quantitative Tightening, the ESTR-deposit rate spread should narrow markedly in the second half of the year.
ECB May 2023 Preview: hawkish Mojo
Summary • With the ‘Angst of the Month’ – the failure of SVB bank and Credit Suisse – firmly in the rearview mirror, expect the ECB to rediscover its hawkish mojo. Relatively speaking of course, because this is the Lagarde ECB after all, not the Weidmann ECB that could have been (more on that on the final page); • Our call: despite a 50bps rate hike back firmly on the table, we expect a compromise: a 25bps hike on Thursday May 4, but with hawkish guidance that there is no stopping the rate hike train yet. The ECB will tee up another quarter point hike for the June meeting. And Lagarde & Co will lean towards more hikes over the summer. Core inflation and wage growth are simply way too high, offsetting improvements in the data elsewhere; • Everything revolves around core inflation. Just two days before the meeting we will get the preliminary inflation figures for April. Furthermore, the ECB will pay close attention to the Bank Lending Survey that is released the same day. Thus, our call can become obsolete very quickly; • This report is divided in two parts. In the first three pages we discuss the economic backdrop that functions as the input to the Governing Council’s decision. Readers who are less interested in the economic raison d'etre of our call can simply skip to the final paragraph on page 4 and read two more pages on the nitty gritty of the meeting.
AFS Weekly Calendar week 13
Key events in the week March 25 - March 31, 2023 Monday March 27 • Germany IFO Business Climate • Dallas Fed Manf. Activity • ECB's Schnabel Speaks • Fed’s Jefferson Discusses Monetary Policy Tuesday March 28 • ECB's Muller Speaks • US Wholesale Inventories • US Conf. Board Consumer Confidence • Richmond Fed Manufact. Index Wednesday March 29 • Germany GfK Consumer Confidence • US Pending Home Sales Thursday March 30 • Eurozone Consumer Confidence • Germany CPI EU Harmonized • US Jobless Claims and GDP • Fed’s Barkin and Collins Speak Friday March 31 • Japan CPI • UK GDP • Germany Unemployment • Eurozone CPI and Unemployment • U. of Mich. Sentiment • Fed’s Cook Discusses US Economy and Monetary Policy
AFS Morning note 24/02/2023
Top Headlines: Macro Summers Sees Signals of a Sharp Drop-Off in Economic Activity Bank of Japan Governor Nominee Predicts Inflation Rate Will Fall Soon U.S. looks to expand Taiwan military training North Korea test-fires cruise missiles to demonstrate nuclear counterattack China Calls for Cease-Fire as War in Ukraine Enters Second Year Financials Deutsche Bank Studied Credit Suisse Deal Options Before Overhaul Bankman-Fried Prosecutors Allege Plot to Shape Crypto Policy Other U.S. likely to cap level of S.Korean chips made in China TSMC’s Second Japan Plant to Cost Over $7.4b: Nikkan Kogyo Asian markets led lower by China, but relief over Ueda ruling out BOJ tightening
EU ETS Market update 23/01/2023
EUAs look set to hold onto recent gains this week, with a supportive energy complex driving buying interest, but trading could stay rangebound under €85. Colder weather is driving both higher gas prices and driving stronger EUA demand. Cold weather looks set to persist a bit longer, though German temperatures are forecast to be slightly milder than last week, and the end of the week should bring milder temperatures still.
EU ETS Market update 16/01/2023
EUAs are anticipated to trade largely neutrally this week as they rejected attempts to break lower than 78 euros last week, in spite of the return of EUA auctions. At the time of writing the market is testing 78 euros – which provided strong support over the last few days of trading. Further price losses could be possible if we see a break of that level. Bearish fundamentals could support that analysis – some commentators have pointed out a strong correlation to bearish natural gas prices, while French nuclear is running above 40GW, hydro availablility is good and wind powered generation is running strongly – but a colder spell of weather is forecast this week, which implies some upside risk if heating demand also increases. The status quo would appear to be for relatively mild temperatures for the forseeable future, so colder spells will continue to represent bullish risk. A break of 78 euros would give a bearish outlook, while no break lower might mean the market stays around the 80 euro level given that colder weather but bearish energy market fundamentals.
EU ETS Market update 09/01/2023
This week brings bearish potential with weak fundamentals and a return to auctioning – with 9,166,500 EUAs auctioned this week. Solid wind powered electricity generation and continued mild temperature forecasts will reduce fossil fuelled power generation EUA demand. Looking at power generation for delivery in 2026, gas prices are low enough that fuel switching appears possible again – which could also contribute to reducing some EUA hedging demand. Meanwhile the prospects of recession grow for industry, amidst talk of a more difficult year than last year. At the time of writing on Monday morning