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ECB QE Monitor - October 2020

 

Key points for this month:

  • The ECB's balance sheet is now equivalent to 56% of euro area GDP compared to 39% at the start of the year.
  • August slowdown in purchases was expected, but September flows failed to return to pre-August levels. In September, the ECB bought €67bn under the PEPP and €34bn under the APP.
  • PEPP:
    • The total net purchases under PEPP amount to €566bn since the launch of the program in March, out of an €1350bn envelope that could be used until end of June 2021.
    • The ECB also published the bi-monthly detailed split for PEPP for Aug-Sep at this release.
      • Since the implementation of the PEPP, 90% of this envelope outstanding is in public sector securities
      • PEPP purchases between August and September were in favor of France, Spain, Germany and Italy.
  •  APP
    • In September, ECB net asset purchases settled €34bn under APP vs. €19bn in August.
    • In September, APP by programme: PSPP (€23.1bn; 67.9% of total), CSPP (€8.5bn; 25%), CBPP3 (€2.8bn; 8.3%) and ABSPP (€-0.4bn; -1.2%).
    • Between March and September, the ECB has already used around €100bn euros of the temporary envelope of additional net purchases of €120bn that will end on December 31, 2020.
    • Deviation of PSPP purchases from capital key proportions was in favor of France and Spain against Germany, Belgium.
  • Redemptions:
    • APP redemptions in October 2020 will total €32bn, of which €23.6bn will be PSPP redemptions. Between October 2020 and September 2021, total APP redemptions will be €269bn, of which €209bn will be PSPP redemptions
  • Our convictions:
  • Limited net supply and lower need to support peripheral debt are for sure behind the recent “under-buying”. Otherwise, it is also reasonable to guess that the ECB is creating QE space to support EU issuance in next months. The ECB is likely to buy more supranational debt, in order to support fiscal policy with its QE.
  • Given very weak inflation data and inflation expectations, we expect the ECB to give investors more confidence that its monetary policy support is here to stay.
    • The tools privileged for the extension of the QE programs could be a combination of the PEPP and the APP.
      • PEPP: The ECB could increase in the size of the PEPP to allow an extension into H2 next year. An extension of PEPP reinvestments’ horizon into 2023 would result also consistent with the extension of net purchases.
      • APP: The ECB could announce a new envelope.
    •  The ECB may act also on TLTRO conditions & on tiering multiplier, to offset side effects on banks from even higher excess liquidity volumes.

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BELLAÏCHE Mickael , Fixed Income Strategist
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ECB QE Monitor - October 2020
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