Janney Calls for Disappointing ECB Rate Cut This Week

Today’s weekly report is called another risk-off week as the September 6 ECB meeting is a potential downside catalyst for yet wider spreads in the peripherals. It sees “notable 2/10yr steepening in the Spanish and Italian curves.”

Janney noted:

The European news cycle was quiet for the final week of August, with Angela Merkel spending much of the week in Asia, and the ECB policy machine quieting down ahead of their Sept. 6 policy announcement. Speaking of ECB, it appears the central bank will end up with regulatory authority over EU banks by 2014, a positive step for creating a much more unified Eurozone banking system.

Other notes were as follows:

• “There’s a great deal of pressure on the central bank to do something, and we believe Draghi will cut the benchmark rate 25bps, but not execute on sovereign purchases. Much of the reason stems from a Sept. 12 scheduled German court decision on the constitutionality of the ESM/EFSF bailout mechanisms. Out of (reasonable) self interest, the ECB doesn’t want to start buying sovereign debt, only to have the rug pulled out from under it.”
• Italy/France and Spain/Germany host summits this week, and Spain/Germany likely will include discussions over the need for bailouts.
• EU financial ministers get together in Cyprus on Friday and are set to review better coordinating the EU banking system as well as individual nations’ fiscal policies.
• Germany is set to sell 5 billion euro worth of 10-year notes on Wednesday. France is preparing to issue five-, 10- and 15-year offerings, and Spain is set for two-, three- and four-year debt sales on Thursday.

JON C. OGG