As expected, the ECB kept policy unchanged on Wednesday. The market will be looking for comments from Mario Draghi on the bond market rout that began around a week after the ECB chief’s April presser and seemed to contradict the idea that PSPP is not creating distortions in sovereign debt markets.
It’s possible to spin the upward pressure on yields as a sign that QE is working, as the market reassess inflation expectations in light of new data, although the severity of the intraday moves seems to underscore declining liquidity resulting — at least partly — from central bank purchases.
While it’s possible Draghi will discuss QE exit strategies, he will likely stay on message for the most part, reiterating the importance of implementing the program in full in order to ‘ensure’ that inflation can recover to at or around 2%.
Draghi may also mention Benoit Coeure’s “Yellen moment”, although primarily in the context of how the bank plans to proceed with front-loading and dynamic tapering in months when net EGB supply is expected to come in negative.
Questions about Greece may indeed come up, especially regarding the ECB's support for Greek banks.
Any adjustments to economic forecasts are expected to be minor.
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From SocGen:
With deflation fears largely averted, we expect no policy action from the ECB today and only small adjustments to staff projections. Most of the interesting points are likely to emerge during the press conference, with questions focused on the solvency of Greek banks (especially in case of the potential impairment of Greek public debt), the ECB’s communication policy (following the recent Coeuré incident), reasons for the bond sell-off, the inflation outlook, coming after the higher than expected May printings, and possibly views on exit strategies for the ECB. The Greek issue reached a turning point yesterday. Indeed, the news flow suggests that Greece creditors (the Institutions) have agreed on a joint proposal to be made today to the Greek government. However, concerns remain that some elements could lead Athens to reject the proposals as Alexis Tsipras also submitted his own set of proposals yesterday.
