The focus in Europe has been Catalonia’s push for independence and the attempt by Madrid to prevent it. Tomorrow’s ECB meeting, where more details about next year’s asset purchases, is also awaited. There are three developments that we suspect have been overshadowed but are still instructive.

First, the ECB reported that its balance sheet shrank last week. With the ECB set to take another baby step toward the exit, many are seeing convergence, though we argue that divergence of interest rates and balance sheets has not peaked. The reasons why the ECB’s balance sheet fell are completely different than what the Fed is doing.

The Fed has begun refraining from reinvesting the full amount of Treasury and MBS that are maturing. This quarter, the Fed will not recycle $10 bln a month. The balance sheet will shrink by $30 bln. The pace will gradually increase to reach $50 mln a month in Q4 18. 

The ECB’s balance sheet shrank by 8.2 bln euros last week.

It was not a function of a change in the actions of the Eurosystem. It was that member banks took down about 17.3 bln euros fewer at the weekly refi operation than previously. Recall that refi money is available at a zero interest rate, though collateral must be provided.

What we know is that while the Fed’s balance sheet will shrink by $30 bln in Q4, the ECB’s balance sheet will expand by around 180 bln euros. We expect tomorrow to be informed the size of next year’s operation. If we assume $30 bln a month for nine months, as news wires surveys suggest, the ECB’s balance sheet will expand by 270 bln euros, while the Fed’s balance will shrink by $270 bln over the same period.

The second issue that may have been missed is that earlier today the European Stabilization Mechanism (ESM) issued its first dollar-denominated note today. The 5-year note it sold raised $3 bln at a 2.201% yield. It is about 10-11 bp on top of swaps.  The proceeds were believed to have been swapped back into euros to avoid currency risk.