12 Sep 2019

ECB Thursday

Draghi to open war chest at penultimate meeting

Today’s ECB (Mr.Draghi’s penultimate) meeting is set to be framed against an economic backdrop of persistently low inflation. August’s reading of HICP inflation stood at just 1.0%, the lowest level since Q4 of 2016 and some way below the ECB’s mandated target of ‘below, but close to, 2.0%’. With this in mind and given recent ECB rhetoric, our central case is that a package of measures will be announced at today's meeting. Indeed the July account noted the effectiveness of a package, such as ‘the combination of rate cuts and asset purchases’. We suspect that a decision to cut the Deposit rate (from -0.40% to -0.50%) in itself should be relatively uncontentious, particularly in light of the guidance change in July, which reintroduced an easing bias. We suspect that the ECB will introduce a ‘tiered’ deposit rate system. Possibly akin to that of the SNB and BoJ, which excludes certain balances from attracting negative rates in order to ensure there is no negative impact on bank profitability.

 

QE, how big/how long?

What may be more contentious however is a decision over a restart of net asset purchases. This is particularly so given the comments in recent weeks from several of the Euro area’s ‘core members’ (Germany, France, Austria & the Netherlands) expressing some scepticism over the need for QE. As such, faced with a current inflation forecast below target in 2021 and concerns mounting over muted inflation expectations we suspect that the doves will win the day. Our central case assumption is that the ECB embarks on anywhere between a €30bn & €60bnper month QE programme for one year. We feel that the lower end of this QE forecast and a minimum of a -0.10% cut is well priced into current market rates and anything less than this will be a significant disappointment.

A final point is that we would expect the ECB to remove the time contingent element of its guidance, instead leaving it open, stating that the key rates are ‘expected to remain at present or lower levels for an extended period of time’. This it did in the 2015-2016 period when it was last cutting interest rates.

 

US-China trade news

President Trump has announced that he is delaying the introduction of higher tariffs (from 25% to 30%) on $250bn of Chinese goods until 15 October in what has been termed a “goodwill” gesture. The gesture reflects the fact that the planned date of 1 October would have coincided with the 70th anniversary of the founding of the People’s Republic of China. The decision followed China’s action to exempt 16 types of US products from Chinese tariffs yesterday, ahead of upcoming trade talks. Although small steps, investors have been reassured by the better faith now seemingly evident between the two sides with Asian equity markets largely positive this morning and with US stock futures in the green. Deputy trade negotiators are due to meet in Washington in mid-September, with minister-level talks to follow in October. Exact dates have not been made public yet.

 

Market Orders – Take advantage of volatility

The ECB’s Governing Council Meeting today is one of the most widely anticipated meetings of the year. The main announcement is due to take place today at 12.45pm while President Draghi is due to give his press conference at 13.30. Please see our market overview above for more detail on this. 

Orders are an excellent way to ensure you take advantage of any volatility that may occur on the back of this event. 

 

Cairn Homes: Strong sales rate in H1, but margins disappoint

Cairn Homes this morning released its interim results covering the six month period to 30th June. The results show solid operational progress and strong sales momentum, although margin expectations are tempered by slowing price inflation and higher costs at its high-end Hanover Quay development.

Cairn closed 390 unit sales in H1 at an average ASP of €449k, although this ASP is flattered by the sale of 120 units at Six Hanover Quay. The company is marginally increasing guidance for full-year unit sales to 1,100 (we are currently at 1,090) given a strong forward sales pipeline and good momentum in the current selling season (1,250 units closed or contracted as of 11 September). This is reassuring given the Brexit uncertainty which has intensified in recent weeks and is having a negative impact on consumer sentiment in Ireland (as evidenced by data this week). A gross margin of 18.6% was recorded in the first half and the company notes that this will increase to 19.5% in the full-year based on contracted forward sales (but could be higher if potential higher margin non-core sales complete this year).  The company confirmed its intention to pay its maiden dividend of 2.5c/share and it has also commenced a €25m share buyback programme commencing on 13th September. Significantly, 60% of the group’s market cap is covered by free cash between now and FY22 (€500m).

 

Economic releases

EU 10.00 Industrial Production

EU 12.45 ECB Meeting

US 13.30 CPI