The ECB has to recharge its bazooka: if it continues to ‘shoot’ at this rate it will run out of ammunition in summer
It seemed the definitive action. The ECB dared to remove what was termed ‘heavy artillery’ in March, somewhat later than the Fed, but it did. A € 750 billion asset purchase program called PEPP. However, two months later, the market consensus believes that the program is insufficient and could even end this summer, forcing the central bank to announce new measures. This is a good example of how quickly the coronavirus crisis has evolved and how institutions have had to modify their actions on the go.
Since the German Constitutional Court ruling (casting doubt on the other central bank purchasing program), the ECB has had to increase its purchases under the PEPP from € 20 billion a week to € 30 billion. The bank has used more than 180,000 million euros of the 750,000 it announced. The weekly purchases have been gaining strength, reaching an unsustainable rate to survive the summer.
“We will be taking a close look at next week’s weekly PEPP buying data to see if ECB purchases slow down … If weekly purchases slow down and markets remain quiet, including including fallen angels in purchases and some information on PEPP reinvestments could be sufficient by the ECB at the next meeting, “they explain from Bank of Amercia Merryll Lynch.
The tense calm of the market
However, the tense calm in the market may come precisely from purchases by the ECB (they are relaxing the debt yields), which would force the institution to maintain or increase the rate of acquisition of bonds. “If what appears to be a positive market response this week is a reflection of the ECB’s large purchases, then the ECB will try to reassure the markets by ensuring that it can maintain the recent pace of purchases until the end, announcing a PEPP increase of 300,000 to $ 400 billion in June, promising more purchases even later. ”
From Commerzbank they go further and believe that the ECB will announce an increase in the program by 500,000 million euros. Despite opposition from some members of the Governing Council, the central bank cannot allow doubts about the ability of the buy to keep risk premiums under control.
Out of ammo before the summer’s over
From the manager Axa Investments they explain that, at the current rate, the Pandemic Emergency Procurement Plan (PEPP) will have ended at the end of the summer, but if the situation and the ECB has to accelerate its pace of purchases, then the amount drawn could run out in mid-summer.
“The ECB’s PEPP looked huge when it was announced. Now we are concerned that the pace of purchases may cause the € 750bn game to run out at the end of the summer,” explains Gilles Moëc, chief economist at AXA Investment Managers.
“There is a dangerous spiral that the ECB has to deal with,” says Moëc. “Doubts about the ability of the ECB to break its own self-imposed limits, exacerbated after the recent ruling of the German Constitutional, encourage the sale of bonds of some of the most fragile countries, which ends up forcing the monetary authority to accelerate your daily purchases. At the current rate, the ECB will have exhausted the entire PEPP plan by the end of the summer, much sooner than expected. ”
“We believe that it would be preferable if the ECB announced an extension of the program at its meeting on June 4. On the one hand, it could be seen as a provocation, after the failure of the German Constitutional Court and without having given time for a response. But at the At the same time, the market could interpret the lack of announcements as an indication of low resolution by the ECB, which again could accelerate bond sales in the most fragile countries, “explains the expert.
“If eventual communication errors in this June meeting forced the monetary authority to further increase its purchases, for example by raising them to a level of 13,000 million euros per day, then the ECB would have exhausted all the PEPP by the time the next one arrives the entity’s scheduled meeting on July 16. It is always better to see the ECB as a proactive institution, rather than making decisions dragged by market circumstances, which is why we believe that the preferred course of action would be to announce an extension of the PEPP in June “, concludes Moëc.