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ECB day! A large increase in the PEPP envelope is now consensus after several GC members signaled that June was a live meeting (we expect +€500bn).
The other focus should be on the PEPP composition and modalities, with potential surprises. Our preview: perspectives.group.pictet/sites/perspect…
One surprise I haven't mentioned (because I hate it 😬), is the possibility that the ECB (re-)opens the door to rate cuts as the EUR appreciates, especially in trade-weighted terms.
The probability is low, but not zero, and they could adjust tiering to do so.
One counter-argument is that the FX pass-through to inflation has weakened substantially over the past few years.
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Frederik Ducrozet
@fwred
Here they are. The deviations from capital keys in the ECB PEPP, between March and May 2020.

And the winner is... Italy (no prize for that).
And the loser is... France.
(1/n)
With €37.4bn in BTP purchases, Italy's share stands at 21.6%, above the capital key of 17.0% although not massively so, as I suspected.

Caveat: I'm always applying the capital keys to the total of sovereign debt purchases, i.e. public debt excluding Supranational debt. (2/n)
Here are the deviations from capital keys in % of the total of PEPP sovereign bond purchases. (3/n)
Read 4 tweets
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Frederik Ducrozet
@fwred
ECB accounts: dovish headlines (economic projections were already outdated) and full flexibility stressed on PEPP once again, but also a couple of strange "concerns". (1/3)
ecb.europa.eu/press/accounts…
"The concern was voiced that large-scale interventions in sovereign bond markets could give rise to the risk of “fiscal dominance” and that the programme had to be executed carefully in order not to encourage irresponsible behaviour on the part of governments". 👋@BVerfG (2/3)
"A concern was expressed that lowering the TLTRO III minimum rate 50bp below the DFR could open up the possibility for banks to obtain funds and deposit them at the deposit facility rate instead of increasing their lending to the private sector". Well, that's the goal! (3/3)
Read 3 tweets
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Frederik Ducrozet
@fwred
ECB QE is not “proportionate”. It should be much larger.
A thread featuring @WielandVolker. (1/n)
Some early indicators suggest that the ECB should at least double the size of its Pandemic Emergency Purchase Programme (PEPP), and that is before we get any clarity in terms of the longer term effects of the crisis on economic growth and inflation. (2/n)
We are well aware that the German Court ruling was against PSPP, not PEPP, but the point is still relevant in forward-looking terms including if new complaints against PEPP are brought to the court. (3/n)
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