ECB's Trichet unlikely to go for shock and awe; More QE from BOE?

So we prepare to say 'au revoir' to M.Trichet as he chairs his last ECB meeting today and gives his last post-meeting news conference. Not one to relish the surprise gesture, M.Trichet is unlikely to go for schock and awe in his farewell performance, meaning that the market's definition of 'the whole nine yards' is unlikely to be forthcoming.

Taking the extremes of the market's speculations, he'd cut both the main Refinance Rate and the Deposit Rate by 0.50bp, extend unlimited 2-year fixed rate (being the Refinance Rate) liquidity to banks and indulge in more purchases of Banks' Covered Bonds.

The backdrop is a Eurozone economy that is clearly seriously flagging, with yesterday's September Composite PMI reading of 49.1 falling below the key 50 level, and from 50.7 in August, banks are clearly in distress, with Dexia, being rushed to the intensive care unit as we speak, and a Eurozone debt crisis that seems no closer to resolution. The only fly in the ointment is the rise in the flash estimate of Eurozone headline CPI from 2.5% to 3.0% - a 35-month high.

We therefore only attach a one-in-four chance to a 0.25% rate cut today, and hence even less chance of a 0.5% cut. However, we believe it is much more likely that we will see re-introduction of unlimited long-term liquidity, but only for a 1-year period. Covered bond purchases also seem likely, as the ECB's token gesture towards the effort to stabilize the health of banks.

The effect on the markets is difficult to judge as, what one may call, inverse logic may appear - if the ECB decides to be less generous, one might expect the euro to appreciate on tighter than expected monetary policy. On the other hand, the euro may resume its fall, as the market will be concerned about the ultimate effects of such a policy on the economy and on banks. Vice versa too. Personally, I suspect the euro would display asymmetric reaction, falling on tight policy, but also falling on surprisingly loose policy - 'what does the ECB know that we don't?'

And in the UK, will the Bank of England to add to QE programme? According to median survey projections neither the rate (0.5 pct.) or the QE programme (GBP 200 bln.) will be changed at today's meeting, but if we dig a little deeper 11 of the 32 repondents actually expect an increase in the QE target amount of at least GBP 50 bln - and we agree that the probability is substantial (50 pct) that QE will be increased. We agree as well that it will be at least GBP 50 bln if the MPC increases the QE target amount. The dovish minutes from the September 8 meeting were only the icing on the cake to complete an overall dismal outlook on the world by the MPC with global slowdown, low domestic demand and forecasts of lower inflation.

It's on a knife edge as to whether we see more QE from this meeting but, if I had to plump for a prognosis, it would be that they hold off until the November meeting, and then announce an incremental GBP 100 bln, as by then they will have seen the latest edition of the Bank's Inflation Report. Another argument for holding  off could be constructed from an analysis of yesterday's announcment by the Office of National Statistics that revisions to previously published data imply that growth was actually 3% higher over the last 10 years than reported.  This may lead the more hawkish members of the MPC to conclude that this serves to underline that some indicators of economic health seem to perennially suggest growth is better than comtemporanious GDP figures imply. Thus growth may turn out to be better than thought when the current GDP figures are eventually revised.

With regard to both decisions, one could also get really paranoid and suggest they may both keep their powder dry in preparation for a globally co-ordinated shock and awe announcement from the G20 on 3/4th November!