ECB, tapering announcement in September

The European Central Bank’s governing council met in Tallinn last week, convening in the Estonian capital to contemplate an exit from its stimulus program, against the background of an ever-stronger European economy.

The region’s steady growth has emboldened those who call on the ECB to unwind the quantitative easing (QE) and other unconventional measures that it has taken in recent years.

While mindful of these calls, the bank has certainly not forgotten the “taper tantrum” that erupted in May 2013, when the US Federal Reserve started hinting at a removal of QE. The resulting drama led to one of the biggest market corrections of the last five years, and a European-style tantrum is probably not something the ECB is eager to unleash at this point in time. Gradualism remains the ECB’s watchword. The bank edged a step closer to the exit at last week’s meeting by removing the downside inflation risks in its statement. The governing council dropped its previous guidance that rates might drop further, while reiterating its readiness to increase the amount or duration of its bond purchase should the economy worsen.

We expect an announcement regarding the tapering of its asset purchases in September. We see a more hawkish ECB more as a risk for the bond market than for the equity market, given the low bond yields. Although the risk of a tantrum-like sell-off is low, moderately higher yields toward the end of the year are likely as the ECB approaches the end of its QE program. Our base case is for a gradual tapering starting January 2018 over a six-month period. Regarding the Fed, we expect a continuation of the gradual tightening path, with a hike in June and another later in the year as our base case. We think this should push US bond yields somewhat higher from their current levels, which is badly needed for the financial sector.

Patrick Moonen – Principal Strategist Multi-Asset – NN Investment Partners