The European Central Bank (ECB) dropped the refinance rate less than expected, lowering it by 25bps, to 1.25% April 2, its lowest level since 1999. Where will the ECB go next? The majority of our surveyed economists (7) expect rates to drop to 1% in the coming three months, while two (Citi and Barclays) anticipate the refi rate to drop to 50bp between now and end of June. HSBC forecasts the refi rate to drop to 75bps during the same period. Only Dresdner sees the refi rate remaining at the current level. The outlook is for continued easing if we look six months out. With the exception of Dresdner, eleven of our economists expect a slide in the refi rate below 1.25% between now and end of September. At the low end is Sociéte Générale at 25bp.

As rates edge toward the sub 1% level, expectations are growing for the ECB to increase the supply of money via quantitative easing. There is, however, no consensus on the issue. The ECB has a number of options to select from: it may double the maturity of its refinancing operations, which provide funds to commercial banks at fixed rates, to one year from six months. ECB President Jean-Claude Trichet has described this as an example of credit easing as opposed to quantitative easing. Natixis economist Cédric Thellier says that as a second step the ECB may also buy corporate bonds. ECB Vice President Lucas Papademos is a proponent of such an approach. Council members Juergen Stark and Axel Weber have signalled that they oppose such a move.

The ECB eased rates at a time when eurozone economic activity is contracting, albeit at a slower pace than in February, according to the PMI survey, a leading indicator of GDP growth. The PMI rose to 37.6 in March, up 1.4 from the prior month. While the recovery is far from being in sight, the PMI indicates conditions improved in Germany and France. “In France the indices rose by almost 3 points in the services sector and by 1.5 points in manufacturing,” says Clemente De Lucia, economist at BNP Paribas. “In Germany, the rebound was less pronounced.” Separately, the German investor confidence index reached its highest level in March since July 2007 as the S&P posted its biggest monthly gain in seven years during the month.

Treasury spreads tighten

In the US, the 10-year Treasury yielded 2.70% April 2 as the government borrows in record amounts to try to stem the recession. The average forecast is for 10-year yields to drop to 2.51% within three months, 30bps lower than in Europe. The average forecast is for the 10-year Treasury to yield 2.70% by the end of September compared to 2.86 in Europe. The difference between yields on 30-year fixed-rate mortgages and 10-year Treasury notes narrowed to 2.35% from a high of 3.05% at the end of last year, in part, due to the Feds dramatic steps to purchase an additional $750bn in agency MBS and up to $300bn in US Treasury securities.
“In a single stroke, the Fed committed to expanding its balance sheet an additional $1.25tr,” says Michael Feroli, economist at JP Morgan Chase. “The Fed’s decision was probably influenced to some degree by the growing international trend toward more aggressive quantitative easing.” The Bank of England, Swiss National Bank and Bank of Japan have all taken similar steps. Will the ECB follow suit? For now, it has decided to cut the refi rate by a modest 25bp, lower than expected, helping to boost the euro’s prospects. The European currency jumped to $1.34 on the day of the easing in line with our median consensus for the year. The forecasts were collected before the ECB’s decision.

Consensus April 09

Diese E-Mail-Adresse ist gegen Spam Bots geschützt, Sie müssen JavaScript aktivieren, damit Sie es sehen können