Macroeconomic investors will be focused on Draghi’s decision on the CSPP which is the corporate sector purchase program where the ECB buys 60 billion euros per month in corporate bonds. The plan ends in December which means Draghi will need to decide whether to extend it; if he extends it, he needs to decide for how much and how long. There has been a growing consensus among those skeptical of central bank policies that the Fed’s $10 billion per month in tapering this year won’t matter if the JCB and the ECB keep going with their programs. One of the keys to watch when figuring out what the ECB will do is the inflation projections.
As you can see from the chart below, the 2018 and 2019 inflation expectations have been revised down twice this year. Looking at this chart, I see no correlation or causation between the CSPP and inflation, but higher inflation would cause the plan to be ended and lower inflation allows it to continue because policymakers believe the CSPP causes inflation. Europe has seen improved growth in 2017, so that’s the counterbalance for inflation which pushes policymakers towards ending the program. Some central bank skeptics are saying that the ECB will stop buying bonds because it will soon run out of them to buy. If running out was the only factor preventing buying, then I don’t think there would be a need to taper next year. The possibility of running out of bonds to buy will first be seen by the JCB as it has near the same size balance sheet as the ECB even though the Japanese economy is much smaller than the European economy.
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Bank of America Merrill Lynch made a good point about the aspects affecting the ECB’s decision making being different from that of the Fed. It’s obvious the dynamics are different because the policies have been different as the Fed’s QE 3 program ended in 2014 and the balance sheet is about to be unwound, while the ECB’s CSPP continues until at least December. BAML says that Fed is more concerned with asset bubbles since the S&P 500 is at a record high. It says the EU stocks aren’t at a historic high and the stock market isn’t as important to the economy. I would contend with that first point because the stock market doesn’t need to be at a record high to be a bubble. European equities have high multiples without them reaching record highs. However, the second point is rational because the Fed has ended QE and started the unwind even without high inflation. You can argue there’s a fear of inflation picking up and a fear of being stuck with a large balance sheet and low rates heading into a recession, but the main reason QE is being unwound is fears of financial bubbles. The main case Neel Kashkari has against rate hikes is he thinks the Fed shouldn’t prevent bubbles because they are too tough to see. He thinks some workers haven’t seen enough wage growth.
