Christine Lagarde described the European Central Bank’s asset purchase initiative at the central bank’s monthly meeting on September 9, but, paraphrasing Margaret Thatcher, she said “the lady is not going down”.
At present, the reduction is mainly related to the Pandemic Emergency Purchase Program (Pepp), to a lower level than in the previous two quarters. However, is this the slow road to a full unwinding or a trigger enough to scare the markets?
Lewis Grant, senior global equity portfolio manager, Federated Hermes, said Lagarde’s use of longer-term maturities was clearly meant to keep short-term thinkers from being scared off. He pointed out how recent regulatory crackdowns in China have highlighted how nervous international investors can be.
“Our proprietary investor risk aversion indicator has shown volatility over the past few months and also reflects a slight reversal, albeit from a high risk level – it is too early to report that the markets are bearish, and we’ve seen such short breaks before, but you can tell the headwinds are intensifying.
âWhile the virus may be on the decline, we are just beginning to understand the long-term effects on markets and economies,â he added.
Andrew Mulliner, Head of Global Global Strategies, Janus Henderson, said a slight pullback in buying made sense, given the broader economic recovery. Like Grant, he cited the significant use of the language in Lagarde’s subsequent press conference.
In particular, she was quick to clarify that this was not a decrease, but a recalibration and equated it as such with the increase in pace seen earlier in the ‘year,’ he said. Meanwhile, the topic of ending the Pepp program is expected to be discussed at the December meeting, he added.
âMoving away from the news on asset purchases, there was arguably a more significant shift in the characterization of the recovery and risk in the opening statement.
âIt’s been a while since the ECB talked about potential upside risks to inflation. However, the statement explicitly referred to persistent pricing pressures as an upside risk and staff forecasts were revised upward across the board, âMulliner said.
Konstantin Veit, portfolio manager at Pimco, said that despite the decision to cut Pepp’s levels, accommodative measures remain high.
âThe market anticipates a first rate hike of 10bp in December 2023, well behind the Fed or the BoE, which seems perfectly reasonable. On the contrary, we would view the eurozone as structurally closer to Japan and, as such, see the balance of risks tilted towards a later take-off.
“Although acronyms and monthly asset purchase quantities vary depending on funding conditions and inflation prospects, the ECB will likely continue to purchase assets in the years to come and, like the Bank of Japan, political sustainability considerations may become increasingly important. “
Veit said Pimco’s short-term vision is that the procurement program will be reduced to around â¬ 60 billion per month in the second quarter of 2022, while, like Mulliner, he will also look to December to figure out what will follow for Pepp.
âThe ECB will likely end net buying under Pepp in 2022, and more regular asset buying tools will come back to the fore to refine post-pandemic monetary policy. We expect APP purchases to be stepped up in return.