Amidst signs of slowing global growth momentum the Fed has emphasized a more flexible approach to policy tightening. Although the ECB is only looking to begin reducing stimulus, it looks to be taking a similar tack already as it is faced with a delicate balancing act of reducing accommodation at a time when Eurozone growth has been slowing. Draghi acknowledged as much saying risk was a focal point of discussion and he’d summarise the assessment as ‘continuing confidence with increasing caution’.
As expected, the ECB kept its key interest rates unchanged and continues ‘to expect them to remain at their present levels at least through the summer of 2019’. The ECB also affirmed its intention to end net bond purchases at the end of December which was something it has been guiding the market to for some time. However, they maintained some flexibility as they intend to manage the balance sheet size at €2.6tn by reinvesting the proceeds from maturing bonds ‘for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.’ Moreover, Draghi noted in the press conference that going forward ‘QE is part now of the tool box’.
The statement highlighted a weakening in some economic indicators citing Euro area real GDP as having risen 0.2% qoq in 3Q down from 0.4% qoq in the previous two quarters, along with weaker data and survey results and acknowledged that ‘this may suggest some slower growth momentum ahead.’ Indeed, they revised down their own growth forecasts looking for GDP growth of 1.7% in 2019 and maintained growth at 1.7% in 2020. In terms of the growth outlook, the ECB assessed the risks as ‘broadly balanced’ but then acknowledged ‘the balance of risks is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.’ The ECB while edging the HICP inflation estimate higher to 1.8% for 2018, lowered the estimate for 2019 to 1.6% and kept 2020 unchanged at 1.7%.
As we have said before we prefer to position in select high-grade US dollar denominated Eurobonds from creditor nations. There is more tightening already priced into the UST curve and more scope for rates and yields to fall if the growth environment weakens: the ten year UST offers a real yield a little over 1% whereas the 10 year bund trades on a negative real yield of ~1.5%. We would expect higher grade bonds to perform better in a slow-down and if credit spreads came under pressure; this stance gives us the opportunity to invest down the credit curve should this eventuality occur.