MNI ECB PREVIEW: Bond Investors See Slow Move to Trim Stimulus

--With Rising Euro, Tapering Timeframe Could Be Lengthy

By Jack Duffy

     PARIS (MNI) - European Central Bank policymakers are finally set to start

talks about scaling back their QE bond buying on Thursday but big Eurozone

investors are not looking for any quick action.

     Institutional bond buyers say concrete details of QE tapering are unlikely

before the Oct 26 ECB policy meeting at the earliest and may not even be fully

known by year-end.   

     "There is a risk that they wait even longer and don't announce by the end

of the year," Michael Krautzberger, who helps oversee E90 billion in European

bond investments BlackRock, told Market News International

     While BlackRock's main scenario calls for QE tapering to begin in January,

Krautzberger said "if we don't hear any concrete announcement in September or

October, I think the market would take it that the probability is rising that

they may only start to taper in April." 

     ECB President Mario Draghi avoided monetary policy in his Aug 25 Jackson

Hole, Wyoming speech, but his Q&A responses left little doubt that he is opposed

to any quick stimulus exit. With weak wage growth weighing on headline inflation

"a significant degree of monetary accommodation" was still warranted, he said. 

     Draghi also didn't address a surging euro, but economists say the 13% rise

in the single currency versus the dollar this year could shave anywhere from 30

to 60 basis points off the Eurozone inflation rate next year. A continued rise

from current levels could temporarily put tapering on the back burner, investors

say.  

     "Our sense would be that that $1.25 level is very much in the zone where it

is probably going to get a little too much," Nick Gartside, international chief

investment officer for fixed income at JPMorgan Asset Management, told MNI. With

the euro at that level "you are looking at both the announcement and the manner

of tapering being pushed out further," he said. 

     Draghi will likely address the euro's strength on Thursday, and is expected

to attribute its appreciation at least partly to the stronger Eurozone economy

but to also acknowledge its potentially adverse effects on inflation. New ECB

staff inflation projections to be released Thursday are expected to be revised

downward, showing headline inflation remaining well below its 2% target though

2019.

     Draghi thus faces a delicate communications task Thursday. He will have to

signal that the QE tapering debate has begun while also acknowledging that a

sustained rise in inflation toward its target remains elusive.

     As such, many investors are betting that, while QE tapering will begin next

year, it will be a long, drawn-out process, with reductions in bond buying tied

to concrete progress on bringing inflation back to target. 

     "It may well be that tapering happens over a longer period than we

thought," said Gartside of JPMorgan. "At one point you would have though it

would be a six month period but it may well be over the entire calendar year

2018 if not longer."

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$X$$$,MT$$$$,M$$EC$]