Thread by @CNBCJou

Mega #ECB thread- bear w me:)

Thursday’s mtg is shaping up to be an extremely important one

Most analysts expect #Draghi to tilt further dovish & indicate a “package of measures” for Sep but not act YET
Why wait? 1/ Fed first 2/ New projections in Sep 3/ Hv to agree on package

Reminder: what are ECB’s tools? ⚒:
- forward guidance (currently calendar based)
- rate cuts
- QE (sovereign, agencies, corporates)* I’ll come back to this point
- bond re-investments (ppl often forget this one)

So... What’s priced?
- Market is pricing in 3bps cuts July, 13bps in Sep

What about QE? *tougher to estimate
- Barclays compare mkt reaction post Whatever It Takes to post-Sintra (not really 🍎 to 🍏 but ok) : strong rally already in periphs ; look at BTPs & 5y5y infl 👀

If the ECB *do cut it will be a SIGNIF headwind for banks

See table below from GS banks team (Jernej Omahen) on impact of 20bp cut

Who’s at the bottom?Deutsche Bank & Spa/ Ita Banks

With no tiering,team estimate~ €5.6b hit, 6% EPS cut
BUT-Swiss style tiering mitigates by 1/3

“Since 2014 (when negative rates introduced) , banks have have “paid” the ECB €21bn, €7.5bn last year (80% by German, French, Benelux) “

No wonder UBS CEO Sergio Ermotti is so against further rate cuts 👇🏼

https://twitter.com/cnbcjou/status/1153558227977740288?s=21

And take a look at some of the Spanish banks (via @RaoulGMI)- reminder 👀 the ECB Vice President is Spanish De Guindos 👀

https://twitter.com/raoulgmi/status/1153332768539074566?s=21

Ok what about a restart of QE?The issue here is technical as the ECB are already close/at 33% purchase limit for Germany & more for Nether

=>have to increase limit

Tables below from Jefferies with permutations:
e.g: limit increase to 40% at EUR30bn a month buys them 18mths 🇩🇪

As an aside: there are no legal constraints for them to increase issuer limits since the #ECJ ruling

Would they consider buying bank bonds?Politically v tough but the universe is ~EUR 2.9T &would reduce banks funding costs even further

Possibly one for Lagarde to contemplate🧐

Bottom line- ECB is easing at a time when Fed is about to ease too.

BAML capture this predicament well re:correlation of real yield differentials vs $EUR

The ECB have to keep real rates low & will likely use summer months to figure out what the most effective package is

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