FED and ECB: DOVE AND DOVER

After a highly dovish January FOMC, the Fed again delivered a very accommodating speech at its March meeting. As growth and inflation forecasts have been revised downwards, the new dot plot foresees a status quo of the Fed Funds rates in 2019 and one increase in 2020. We anticipate a soft landing of the US monetary policy with a rate cut in December 2019 followed by a second one in March 2020. In addition, the Fed announced the end of the balance sheet normalization: from May 2019, the monthly caps of Treasuries reimbursements will be lowered from $ 30 bn to $ 15 bn, before full reinvest ments starting October 2019 . MBS repayments will be fully reinvested in UST after October . The concentration of reinvestments on the short end of the curve and the Fed's rate cuts will thus bring a bull steepening of the Treasuries curve. The Fed could also create a repo facility to push banks to substitute some of their reserves with Treasuries in their liquidity buffers. This measure should reduce the overall level of reserve in the market to enable the Fed to pursue a greater standardization of its balan ce sheet. On the euro side, several accommodative measures have been announced by the ECB, including a more dovish forward guidance (no rate hike is expected by the end of the year) and a third series of TLTROs. Following these announcements, the US bearish directional as well as the European advanced macroeconomic figures - which emerged under the consensus - euro rates fell sharply. Hence, the 10-year Bun d has fallen below the 0% line. Mario Draghi accentuated this negative interest rate environment by stating that the ECB should mitigate the deleterious effects of negative rates for banks while preserving their beneficial impacts on the economy. It could be a "tiered deposit rate" for instanc e. The emergence of this new mechanism would mean, at least for the markets, that the ECB would keep rates into negative territory. Faced with our scenario of falling Fed target rates in December 2019 and March 2020, the start of a cycle of rate hikes by the ECB seems to be an arduous path. Our optimistic scenario consists in a 15bp increase of the deposit rate in October 2020 followed by a rise of the 3 key rates by 25bp in early 2021. Beforehand, we expect the ECB to set up a tiered deposit rate in June 2019. We therefore anticipat e a yield-hunting phase that peripheral debts will benefit from. Moreover, the 10-year Bund should return into positive territo ry towards the end of the year.