Thread by @AGarciaPascual

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@ECB has to react this week to #COVIDー19 as EA heads into a recession

There is more limited fire-power at the ECB than at the Fed, but it does not mean the ECB won't act

Targeted support for SMEs is crucial

Time to learn about the reaction function of ECB's new owl

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1. While there is far more limited fire-power at the ECB than at the Fed, it does not mean the ECB won't act; it will

2. The ECB will try to support SMEs through TLTRO possibly introducing full-allotment

3. It will also signal more QE

4. It won't cut the depo

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EA is heading into recession in H1 2020.

Financial conditions have tightened materially:

1) European equities are down along with the growth outlook and as part of de-risking by investors

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2) credit spreads have widened

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and 3) the euro has appreciated, partly as a result of the far larger capacity of the Fed to cut rates relative to the ECB

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So what will the ECB do?

1. Helping out the SMEs is critical.

SMEs do not have direct access to ECB facilities, so the ECB will have to help through its TLTRO III program.

The ECB could remove the borrowing cap for TLTRO and set full-allotment.

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2. ECB will hint that is ready to increase QE:

Increasing the monthly pace from 20bn to 30bn is possible and likely, if not this meeting then next.

A monthly pace of 30bn means that next year the ECB would hit a constraint.

But the ECB could load more on corporate debt

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3. Expect no depo rate cut for now.

It would take a sharper appreciation in the EUR (EURUSD at 1.20-1.30) for the ECB to cut the depo.

The market expects a 10bp depo cut between next week and April.

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Time to find out how reactive is ECB's new owl...