Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

Legg Mason Perspectives: ECB – Renewed focus on inflation

By Andreas Billmeier, PhD, Western Asset

 

New policies announced by ECB President Lagarde surprised markets on the dovish side, delivering more support than expected…

In a meeting held at the end of last week, the European Central Bank’s (ECB) Governing Council resolved to further expand its monetary accommodation by enlarging the Pandemic Emergency Purchase Programme (PEPP) by €600 billion, lengthening its duration by six months to at least the end of June 2021, and committing not to reverse the effect of those PEPP purchases until at least end-2022. In addition, ECB President Christine Lagarde presented new macro forecasts that take into account the economic performance to date and show a worryingly low inflation forecast of 1.3% for 2022.

With these decisions, the ECB clearly surprised the market on the dovish side, as reflected in significantly lower peripheral yield spreads over German bunds at the time when the statement was published. We think that the surprise was indeed holistic in the sense that the ECB delivered more than the market was expecting on all decisions it took. That said, combining the increase with the extension implies that the purchase rate of sovereign bonds under the PEPP will stay roughly unchanged into 2021. Based on today’s decisions, we expect the spread between yields on core and periphery bonds to compress further, but the ECB may have to do more to get medium-term inflation and inflation expectations back up.

On other important issues, Lagarde clarified that the ECB’s Governing Council has not discussed in detail the prospect of including sub-investment-grade-rated bonds in the purchase programs. Regarding the recent ruling by the German Constitutional Court, Lagarde had to repeat her view several times that the ruling was directed at German authorities and that she was confident that a good solution could be found. In this context, she underlined that a version of the “proportionality assessment” requested was inherent in the ECB deliberations and always found its way into the meeting accounts, hinting at a way that the Bundesbank and other institutions could defuse the issue.

We also note a pointed exchange toward the end of the press conference regarding Lagarde’s strong focus on her written brief. While this might seem a minor point, we actually think this is quite important: After a couple of wobbles in previous press conferences, Lagarde did not commit any delivery mistakes during this meeting, while having to communicate inflation forecasts that arguably no longer converge to the target. This is no minor feat and consistency of message is obviously crucial in this context even though the market will still require time to digest the new forecasts.

We think that decisions taken during this conference need to be viewed against the backdrop of the shockingly low inflation forecast, as argued by Lagarde in the press conference, but also against the fiscal developments in European economies and at the European level. While this year’s purchases of sovereign bonds is roughly enough to cover governments’ COVID-related stimulus outlays, the PEPP extension is arguably meant to further accommodate EU borrowing in the context of the Next Generation EU programme currently still under negotiation. Stepping back for a second, the ECB is clearly satisfied with the progress on the fiscal front, and will happily support those efforts even though it is hard to judge at this point whether a pandemic emergency will still exist in 2021, including in light of the growth rebound forecasted by the ECB. For that reason, Lagarde stressed the link between the PEPP as a monetary policy instrument and the need to deliver an appropriate monetary stance via the most effective tool in the shed, for now.
 


Legg Mason Key risks and Disclaimers

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

 


MeDirect Disclaimers

This information has been accurately reproduced, as received from Legg Mason Investments (Europe) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Share on facebook
Share on linkedin

Experience better banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. Sign up and open your account for free, within minutes.

Latest news articles

All News

BlackRock Commentary: Why we still prefer stocks over bonds

Equities have fallen hard this year on the prospect of rapid rate increases to rein in inflation, the tragic Ukraine war and a slowdown in China. BlackRock think equities remain more attractive than bonds, even as the historic sell-off in bonds has cut the gap between the two.

All News

Notes from the Trading Desk – Franklin Templeton

Given recent declines, there is much discussion around what is priced into market. With global markets declining for six consecutive weeks, there is an increasing debate over how much bad news is priced in, and whether markets are now oversold.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.