And the jawboning begins:
As Europe’s banking system collapses, ECB is resorting to over-promising more of the same and as ECB Governing Council member Olli Rehn said, the ECB “will announce a package of stimulus measures at its next policy meeting in September that should overshoot investors’ expectations.” More from Bloomberg:
“It’s important that we come up with a significant and impactful policy package in September,” ECB Governing Council member Olli Rehn (governor of Finland’s central bank) says in interview with Wall Street Journal.
“When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker”
The euro plunged.
And Italian yields tumbled…
As the 10Y Bund yields tumbled to fresh session lows…
… in the last round of the global race to the bottom, where if the Fed eases, everyone else has to ease even more.
As a reminder, this is the “menu” of ECB proposals currently facing Mario Draghi, and which the ECB will have to pick one to “shock and awe” markets and push inflation expectations higher:
- First, a “small” program which includes a 10bp deposit rate cut and corporate purchases (scaled to EUR 5bn per month for six months).
- Second, Goldman constructs a “medium” package which includes a 20bp rate cut with tiering, somewhat stronger forward guidance, corporate purchases (EUR 5bn per month for nine months) and limited sovereign purchases (EUR 25bn per month for nine months).
- Third, the bank considers a “large” package that contains more aggressive sovereign purchases (scaled to EUR 75bn per month for twelve months) via an increase in the issuer limit, in addition to the other elements in the medium package.
Goldman also expects the Governing Council to adopt the “or lower” easing bias for policy rates in July and indicate that the ECB will analyze QE options for September. At that point look for an easing package that closely resembles the “medium” package discussed above, including a 20bp rate cut with tiering, enhanced forward guidance and a return to QE.
Furthermore, Goldman expects the asset purchases to include corporate bonds and sovereign debt within the existing PSPP headroom, paired with a signal that the Governing Council stands ready to expand the sovereign purchase program with an increase in the issuer limit if economic conditions do not improve.
Finally, while earlier action is possible, the September meeting appears the most likely given new staff projections and the timing of the next FOMC meeting, which is at the end of July 30-31.