Draghi announces sizable ABS – EUR/USD dips below 1.30

After the ECB shocked markets with a cut deeper into negative territory, president Mario Draghi met  the press and made another major announcement.  He launched  a broad based ABS / QE program that will have a sizable impact on the balance sheet. Details will be  revealed in October. EUR/USD dipped below 1.30 but stabilized above this level.  

Here is a summary and the live blog of the event

Highlights

• ABS  announced: broad portfolio of  asset buys.
• To begin in October, details coming then
• Sizable impact on the balance.
• EUR/USD dips under 1.30 but bounces back.
• The council was unanimous on unconventional measures, not on exact decision
• 2014 GDP forecast lowered to 0.9%.
• Inflation forecasts: 0.6% in 2014, 1.1% in 2015 and 1.4% in 2016
• RMBS – real estate related assets are included.

Live Blog

• 12:20 GMT All times are GMT, press  conference begins at 12:30. You can watch the press conference here.
• 12:22 EUR/USD down at 1.3027, a bit above the new low of 1.3013
• 12:22 Earlier, the ADP private sector NFP slightly disappointed with +204K
• 12:23 At the same time, the US will report weekly jobless claims and the trade balance.
• 12:25 Here is a guide to the next level of EUR/USD (below 1.30)
• 12:26 At current levels, the pair is at the lowest since July 2013.
• 12:28 All three rates were lowered, with the biggest one being the deposit rate, which is  even  lower to -0.20%. Yes, minus 20 basis points.
• 12:30 US jobless claims rise to 302K.
• Press conference begins
• 12:31 EUR/USD at 1.3010  as Draghi talks.
• 12:31 Draghi reads out the interest  rate cuts.
• 12:32 QE Announced: broad portfolio of ABS
• 12:33  Interventions to begin in October – details to be announced in the next meeting.
• 12:33 Difference between various economies.
• 12:34 Continued subdued dynamics
• 12:34 EUR/USD dips below 1.30
• 12:34  Measures intended to underpin economies.
• 12:35  GDP unchanged in Q2. The outcome was weaker than expected.
• 12:35 Loss in cyclical growth momentum
• 12:37  Forecasts: GDP seen rising 0.9% in 2014, 1.6% in 2015
• 12:37 GDP revisions have been revised downwards for 2014 and 2015.
• 12:38 Heightened geopolitical risks weigh.
• 12:39 Inflation expectations to remain low in upcoming months.
• 12:40 Measures meant to enhance the underpinning
• 12:40 Inflation forecasts: 0.6% in 2014, 1.1% in 2015 and 1.4% in 2016
• 12:41 Loans remain negative.
• 12:42 Against the background of weak credit growth, the ECB is analyzing banks’ balance sheets.
• 12:43 A cross check of the economic signals, the ECB decided on further action, supporting lending to the real economy.
• 12:44 More measures needed from governments.
• 12:45 Questions begin, as EUR/USD bounces back to 1.3022.
• 12:46 Not a unanimous decision
• 12:46 The cut was a “technical adjustment”.
• 12:46 Rates are now at the lower bound
• 12:47 The ECB wants to enlarge the size of the balance sheet towards the size it was back in 2012.
• 12:48 Some members wanted more and some wanted less.
• 12:49 Earlier, there were  reports about a 500 billion euro program.  
• 12:50 Draghi explains QE: it can be private and public sector.
• 12:50 Banks do 80% of intermediary lending.
• 12:51 Today’s measures are predominantly aimed at lending easing.
• 12:52 Draghi doesn’t reveal the size of QE. Says it’s pointless to discuss. At this stage, it is difficult to assess.
• 12:53 The credit easing component is key.
• 12:54 EUR/USD  stabilizes at 13025.
• 12:54 “There was a comfortable majority”
• 12:55 Draghi repeats the message that the program is meant to extend credit.
• 12:56 Draghi is asked about sterilization.
• 12:56 EUR/CHF also touched  a new low before stabilizing. 1.2043 was the low.
• 12:57 In August we have seen a worsening of the medium term inflation outlook – downward movement in all indications of inflation expectations. One of the most used  measures 5Y/5Y dropped.
• 12:58 Growth recovery was losing momentum.
• 12:59 The measures strengthen the TLTRO.
• 12:59  Now we are at the lower bound.
• 13:00 Buys to include  RMBS – real estate related.
• 13:01 The underlying assumptions for 2015 haven’t changed. The usual assumptions are behind this. This year is seen as a temporary deviation.
• 13:03 There are three instruments for revamping growth: structural reforms, fiscal policy and monetary policy.
• 13:04 Ambitious structural reforms are necessary, and if they don’t appear, any fiscal and monetary moves are limited.
• 13:05 Draghi clarifies the  Jackson Hole speech.
• 13:05 EUR/USD beginning to sink once again, below 1.3020.
• 13:07 We decided to go ahead with this program. Some regulation has changed for the better regarding treating ABS in a less discriminatory way.
• 13:08 We are completely focused on the bank lending channel.
• 13:09 EUR/USD is slipping back down to 1.3010.
• 13:10 Securitization has a bad name, because of what was done in the past.
• 13:10 Draghi  says there is on “bargain”. It is difficult for us to reach our objective only on monetary policy. Growth and employment are needed. There isn’t any grand bargain.
• 13:11 Won’t tell leaders what to do.
• 13:12 Regarding the meeting with Hollande, it was a review of the  monetary situation in the euro-area. Difficult for me to comment.
• 13:13 Quite clear to everybody that the desire to undertake the reforms is there.
• 13:14 Lithuania welcome in the euro-zone.
• 13:15 Draghi reiterates need for structural reforms. Countries should not lose sovereignty but rather share sovereignty  .
• 13:19 We decided to complement the measures from June.
• 13:20 Unanimous in the intent but not in the exact measures – not contradictory.
• 13:22 The seller of ABS is likely to use the money to reinvest in real estate after the ECB frees it.
• 13:23 Do  lower rates and LTRO make ABS less attractive?
• 13:24 Monetary policy can only do so much.
• 13:25 Draghi repeats the mandate: inflation at around 2% or a bit below.
• 13:26 The ABS will become more and more attractive when rates rise.
• 13:27 ABS will complement the TLTROs, not cannibalize each other.
• 13:28 Would the truth be a risk? Do we really think that lying would affect people’s behavior? Answer: no. We don’t see deflation but don’t see inflation lower for a long time.
• 13:29 Draghi says again that most of the fall in inflation is due to a drop in energy and food.
• 13:30 The economic slack and unemployment are playing a growing role in lower inflation.
• 13:30 Press conference ends. EUR/USD at 1.3023.
• Here is a guide to the next level of EUR/USD (below 1.30

Background

After Draghi’s Jackson Hole speech, expectations were high for action, or at least for hints of an imminent QE program. The ECB already did more than most (not all) economists expected: the central bank cut the rates, with cutting the deposit rate deeper into negative territory.