As discussed earlier, Draghi could again disappoint those looking for market volatility. With the ECB seemingly on auto-pilot mode ahead of the conclusion of its PSPP programme and not expected to move on rates until “at least through the summer of 2019”, the topics for discussion are relatively limited.
It is unlikely that journos will use this meeting as an opportunity to grill the ECB President on what exactly “at least through the summer of 2019” means given his resistance to such questions in July. Draghi will also likely take a similar approach this time to any questions about his tenure despite continued speculation over who his successor could be next year.
As a result, the bulk of the focus for the press conference could center around the updated economic projections – which are expected to be cut – trade protectionism and general economic commentary with no immediate policy decisions expected.
One matter that could prompt more questions during the the conference could be the Bank’s view on reinvestments, and specifically with the PSPP winding down during Q4, markets will require greater clarity on the ECB’s approach to reinvestments with speculation fueled by reports in July over a potential “operation twist” mechanism. UBS believes that the “ECB has some flexibility to extend the duration of monthly PSPP purchases to at least partially offset the PSPP portfolio maturity decay”. However, the Swiss-bank concedes that such an issue faces “implementation constraints due to issue(r) limits, limited flexibility on capital key allocation and fragmented liquidity across the EGB markets are likely to prevent the ECB from formalising a duration target for the PSPP portfolio”. Overall, SocGen do not see this as a pressing issue and ultimately “see no material policy impact from these decisions”.
Meanwhile, the focus continues to reside on Italy with the newly-installed government taking an increasingly conciliatory tone with regards to their budgetary intentions. Despite this seemingly new approach from the populists, a clash between the nation and the EU seems almost inevitable. Such a clash would lead to grave concerns over Italy’s fiscal discipline with worries also heightened by fears over the nation’s intentions for debt held at the ECB. Subsequently, journalists will likely probe Draghi on his views on the matter and what mechanisms the Bank has to counter any potential Italian crisis. However, Goldman Sachs expect “Mr. Draghi to avoid making any direct market commentary related to Italy or Italian policy proposals. With regards to ECB treatment of Italian debt, we expect Mr. Draghi to be nonspecific and refer to the general rules already in place.
While no surprises are expected, the market could respond harshly to any Draghi comments that are out of line as shown in the table below.
Live press conference below: