ECB: dovish tone and calm markets - but flexibility needed with volatility ahead

United Kingdom, 4/27/18,  by Amundi

ECB tone: The overall stance is still broadly accommodative and aims to confirm the
consensus view. It is reasonable to expect a gradual tapering of the Asset Purchase
Programme (APP) in Q4 and the first rate hike in mid-2019. However, the ECB still questions
the reading of the recent deterioration seen in the surveys: it seems likely that it could wait
until July to clarify its monetary strategy.

Economy and risks: As expected, President Draghi did not talk-down the economy but,
instead, took the opportunity to stress that real GDP growth outlook, despite signs of
moderation in Q1, is still solid and broader based in terms of engines of growth. While the
risks to growth are still considered balanced, the "global risks" - in particular the rise in
protectionist tensions - have become prominent.

Investment strategy: Carry is still the ‘name of the game’ to generate value in Euro fixed
income (as the recent slowdown in growth does not call for a faster change in current
monetary policy) at least until the next meeting. High flexibility applied to portfolio
management is a must, in our view, to benefit from the expected volatility that will arise
when ECB delivers a clearer message on what will come next. On global credit, different
phases in the cycle call for actively playing sector divergences in Europe and the US. In
Europe, we are cautious on industrials and prefer financials, while in the US is the opposite:
we prefer industrials, energy and TMT, but we are less keen on financials.

As expected, the ECB has not changed its monetary policy. President Draghi's
press conference was, as usual, eagerly awaited, particularly in view of the recent deterioration
of business and confidence surveys. Mario Draghi was reassuring about the ongoing recovery.
This deterioration is explained by temporary factors (weather conditions, strikes, protectionist
risk, etc.) and also reflects, to some extent, a kind of normalisation after a year of strong growth
(2.4% in 2017, the highest growth since 2007). Core inflation remains subdued, but the
economic outlook is supportive and the ECB continues to expect a gradual rise in inflation.
That said, the ECB remains cautious. While the risks to growth are still considered balanced,
the "global risks" - in particular the rise in protectionist tensions – have become prominent.
Consequently, the tone is slightly more accommodative than at the last monetary policy
committee. But this “caution is tempered by unchanged confidence that inflation will converge
in the medium term towards its target of 2%”. To achieve this result, the ECB must maintain a
high degree of monetary accommodation. On this point the ECB communication is unchanged.

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  1. ^ [1] Source IPE “Top 400 asset managers” published in June 2018 and based on AUM as of end December 2017
  2. ^ [2] Amundi figures as of September 30, 2018
  3. ^ [3] Investment hubs: Boston, Dublin, London, Milan, Paris and Tokyo
  4. ^ [4] Based on market capitalization as of September 30, 2018

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