Select Page


 

  • ECB expected to turn more dovish due to weak Eurozone economy
  • Unemployment claims remain elevated due to distortions
  • Productivity expected to weaken
 

ECB expected to turn more dovish due to weak Eurozone economy — The ECB at its policy meeting today will leave its key interest rates unchanged, but the ECB may take a more dovish tone with reduced GDP forecasts and a possible change in its interest rate guidance.  The ECB at its last meeting already shifted its assessment of the risks to the downside from neutral.  The ECB’s deposit rate is currently at -0.40% and the refinancing rate is at zero. 

The ECB’s current guidance is that it expects interest rates to remain at current levels “at least through the summer of 2019.”  Regarding its balance sheet, the ECB ended its QE program in December but promised to keep its balance sheet stable with a reinvestment program that will last “for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.”

The market consensus is that the ECB will not start raising interest rates until mid-2020.  The market consensus is therefore more dovish than the ECB’s current guidance for unchanged rates at least though this summer.  The ECB as soon as today could adopt more dovish guidance by extending the promise for unchanged rates beyond summer or by dropping a time-frame altogether and saying that the decision is data-dependent.

More dovish interest rate guidance is one of the ECB’s few operational policy tools right now.  We therefore suspect the ECB will keep more dovish guidance in its back pocket for now in the event that it is needed in coming months if the Eurozone economy continues to weaken.

The other main policy question for the markets is whether the ECB will soon announce an extension of the targeted longer-term refinancing operations (TLTRO) that the ECB granted in 2016-17 that total 720 billion euros.  The first of those 4-year bank loans will start expiring in June 2020, but the ECB has to take action well before they start to expire to prevent a tighter bank liquidity situation because those loans only count in banks’ net stable funding ratios if the loans have more than a year to expiration.

The market consensus is for the ECB at today’s meeting to have a robust discussion on TLTROs.  The ECB could announce its TLTRO plan as soon as today if the ECB wants to sooth the markets and make it appear as though the ECB is doing everything it can to prevent the Eurozone economy from sinking further.   However, the consensus is that the ECB will likely defer a TLTRO announcement until its June meeting.  Indeed, ECB Governing Council member Nowotny about two weeks ago said of the TLTRO decision, “In March we will make an interim assessment, but I would only expect the implementation to come later.”  He added that, “There is time until around summer” to make a decision on new TLTROs.

The ECB today is expected to revise its GDP forecasts lower due to the recent slump in the Eurozone economy.  The ECB may cut its 2019 GDP target to the +1.3% area from its December forecast of +1.6%.  The market consensus is currently for Eurozone GDP to downshift to +1.4% in 2019 and +1.5% in 2020-21 from the stronger rates of +2.4% in 2017 and +1.8% in 2018.  Eurozone GDP was weak in the second half of 2018 at only +0.8% (q/q annualized) and there are few signs of any major improvement in early 2019.

The ECB is also under pressure to maintain a dovish tone given the weak inflation outlook.  The February Eurozone core CPI rate of +1.0% y/y was well below the ECB’s target of just under 2.0% y/y.  The Eurozone core CPI has been locked in the narrow range of 0.7-1.2% over the past year and is showing no signs of upward movement to the ECB’s target, thus keeping the pressure on the ECB to maintain a very easy monetary policy.

ECB President Draghi has only five ECB meetings left before his 8-year term ends this October.  A recent poll by the Financial Times found the following officials as the most likely to become the new ECB President:  former Bank of Finland governor Erkki Liikanen, Bank of France governor François Villeroy de Galhau, ECB Executive Board member Benoit Coeure, and Bank of Finland governor Olli Rehn.

Bundesbank President Jens Weidmann is often named as a potential candidate for ECB President, but he is considered as too hawkish by many European politicians and German Chancellor Merkel is angling to have a German appointed as the new European Commission president, which would mean that a German would not be named as ECB President as well.

 

 

Unemployment claims remain elevated due to distortions — The U.S. claims data remains in generally favorable shape, although claims remain somewhat elevated due to recent distortions from the Dec/Jan U.S. government shutdown and holidays.  The initial claims series is +15,000 above the 49-year low of 200,000 posted in mid-January and the continuing claims series is +175,000 above the 4-year low of 1.630 million posted in October 2018.  The consensus is for today’s initial claims report to be unchanged at 225,000 (following last week’s +8,000 increase to 225,000) and for today’s continuing claims report to show a -31,000 decline to 1.774 million (after last week’s +79,000 rise to 1.805 million).

Productivity expected to weaken — The consensus is for today’s Q4 non-farm productivity report to ease to +1.5% from +2.2% in Q3.   Productivity saw a big improvement in 2018 in Q2 (+3.0%) and Q3 (+2.2%) thanks to strong GDP figures from the tax-cut stimulus.  However, productivity is now falling back toward the 8-qtr average of 1.4%.

CCSTrade
Share This