ECB: The Q1 Covid Lockdowns

Published on January 19, 2021
SGH Insight
** The exact impact of the lockdowns, which are not being applied consistently between countries, and which are expected to run now through March, is however difficult to gauge, with ECB officials waning agnostic between the economic impact of more severe, but shorter lockdowns, and softer, but more drawn-out ones.

** But as it impacts policy, they will point to the explicit linkage that was already drawn by the ECB between the extended, “at least through March of 2022” envelope of the topped off 1.85 trillion euros PEPP (Pandemic Emergency Purchase Program), and Covid vaccination roll outs, with the program designed to safely cover at least one quarter beyond the again, conservatively, estimated expectation for vaccines to have reached a broad swathe of the Eurozone population by the end of 2021.

** Indeed, ECB officials believe they have provided easily enough room for PEPP purchases that, if anything, it may raise the question of whether they would need to continue to buy a last hundred or so billion euros of bonds in the first quarter of 2022 if the economy performs as expected. While a question for another day, that view is in and of itself telling.

Market Validation
(Bloomberg 1/21/21)

Euro Rises to One-Week High on Hint of ECB Easing Life Support

German, Italian bonds slip; ECB seen easing pace of purchases
Implicit yield curve control could be temporary, says Robeco
The euro climbed and bonds across the region slid on signs that the European Central Bank’s level of stimulus may slow over the coming months.

The common currency rose as much as 0.6% to touch $1.2173, the highest level in a week, and both German and Italian bonds declined. The moves came after the policy statement said that its pandemic-bond purchase program need not be used in full should favorable financing conditions be maintained.

With the ECB having ramped up its bond-buying plan to 1.85 trillion euros last month, market expectations for any change going into this meeting were low. While the region’s risks are to the downside, President Christine Lagarde highlighted the vaccine rollout, the Brexit deal and the bloc’s joint bond issuance as positive economic drivers.

(Dow Jones 1/21/21)

ECB Comments Accelerate Eurozone Government-Bond Selling -- Market Talk

Selling in eurozone government bonds accelerates after the European Central Bank flagged the possibility of not using the EUR1.85 trillion Pandemic Emergency Purchase Programme in full if favorable financing conditions can be maintained. Ten-year German Bund yields trade 3.5 basis points higher at -0.524%, and yields of other core and semi-core 10-year bond yields are up by a similar magnitude. Peripheral government bonds, in particular those of Italy, come under greater pressure, with the yield on the 10-year Italian BTP 6 basis points higher at 0.675%, according to Tradeweb.

There is little expectation in markets that the European Central Bank will add to the latest round of stimulus measures announced just last December when the Governing Council convenes for its January 21 Monetary Policy Meeting this Thursday.

But investors will still keenly tune in to hear President Christine Lagarde and her colleagues’ assessment of the impact of Europe’s latest, and severe, Covid lockdowns on the ECB economic and policy outlook for 2021.

The following “stay the course” message is what they will hear:

** The lockdowns will clearly exert a negative influence on Q1, 2021 Eurozone growth, but ECB officials point out that their own forecasts for the first few months of 2021 had already been lowered from the September 2020 outlook to around 0.6%.

** A lot of the downwards adjustment in expectations, they note, is happening to the more optimistic among market forecasts, including, for example, a Reuters survey Q1 GDP consensus that was lowered from around 1.1% closer to the ECB’s own numbers. In other words, the ECB was already quite cautious in its recovery outlook going into 2021.

** Having said that, and while this meeting is not a forecast revision round, ECB officials suggest that Q1 growth could end up coming in lower than even their modest numbers, closer to zero, or even register a slight negative, as the Covid shutdowns put a renewed winter chill on service spending. That weakness is, however, seen as transient, and ameliorated by evidence that the Eurozone is coming off a decent Q4 2020, with exports having held up, the German economy showing resilience, and overall data indicating a pace there very close to the negative 2.2% growth rate that was expected after the sharp, 12.4%, Q3 2020 rebound.

** The exact impact of the lockdowns, which are not being applied consistently between countries, and which are expected to run now through March, is however difficult to gauge, with ECB officials waning agnostic between the economic impact of more severe, but shorter lockdowns, and softer, but more drawn-out ones.

** But as it impacts policy, they will point to the explicit linkage that was already drawn by the ECB between the extended, “at least through March of 2022” envelope of the topped off 1.85 trillion euros PEPP (Pandemic Emergency Purchase Program), and Covid vaccination roll outs, with the program designed to safely cover at least one quarter beyond the again, conservatively, estimated expectation for vaccines to have reached a broad swathe of the Eurozone population by the end of 2021.

** Indeed, ECB officials believe they have provided easily enough room for PEPP purchases that, if anything, it may raise the question of whether they would need to continue to buy a last hundred or so billion euros of bonds in the first quarter of 2022 if the economy performs as expected. While a question for another day, that view is in and of itself telling.

** The main message on the policy side will thus be that the ECB, with an eye to a rebound in the spring, will seek to keep overall financial conditions easy and stable, essentially where they are, and that the PEPP program, barring any nasty surprises, was already calibrated to provide more than enough stimulus to cover 2021.

** And on the all-important fiscal side, ECB officials note that national budgets, while lagging the fiscal turbocharge that is being pushed across the Atlantic, are still set to run strong into 2021, with Germany in particular ending 2020 with around 200-220 billion euros in unused spending in its coffers, and a deficit of only around 150 billion euros — hard as Berlin tried to emulate its more profligate southern neighbors. While this money cannot, legally, simply be reallocated to 2021, it can be stashed in funds to be quietly tapped later as needed.  EU-wide stimulus funds, such as the NGEU (Next Generation EU) Recovery Fund, on the other hand, continue to lag, expected to kick in only in the second half, and are intended more for structural programs than for a cyclical boost.

** Finally, ECB officials are monitoring, but to now brush off, the impact of the renewed bout of political turbulence around the government of Prime Minister Giuseppe Conte in Italy. As one source shrugs, pointing to the hands-off approach the ECB took to similar instability in 2018, the markets are doing most of the ECB’s heavy lifting already in the sovereign bond markets, and seem to have internalized an effective “yield-curve control type” ECB cap on peripheral spreads should they wobble too far.

 

 

 

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