No new measures or monetary policy signals should be expected from the ECB at the August meeting as the threshold for further near-term easing is very high. The message is not set to move long yields from the record-low levels, while the ECB should be happy with a further weakening of the euro.
The big picture remains that the ECB will want to assess the effects of the June easing package and that can be done at the earliest at the end of the year after the amount taken from the first TLTRO operations are known.
Rays of light despite geopolitical concerns
Recent economic data contained both good and more worrying news. GDP growth in Spain firmed in Q2 (0.6% q/q). GDP data from Italy will be out this week; monthly indicators point towards a small increase after Q1’s decline. All in all, Euro area GDP probably rose a bit in Q2, but not faster than in Q1 (0.2% q/q), despite a catch-up effect after the cold winter. The recent slowdown in German growth is probably temporary, but still – there is reason to worry when the Euro area growth motor sputters, all the more so as the German manufacturing sector is more exposed to the slowing Russian economy than the Euro area is on average.
The PMIs improved again in July, while the weakening of the euro should somewhat offset the effect of a weaker growth outlook stemming from geopolitical tensions. The geopolitical risks are nothing new, since the ECB noted already in July that risks to the economy are to the downside and geopolitical risks, as well as developments in emerging market economies and global financial markets, may have the potential to affect economic conditions negatively. Still, ECB should emphasize that geopolitical risks have increased further lately.
Euro area July inflation printed at 0.4%, painfully low, but as the ECB already pointed out in the July meeting: on the basis of current information, annual HICP inflation is expected to remain at low levels over the coming months, before increasing gradually during 2015 and 2016. Hence, another low print should not push the ECB over the brink to new action. Draghi could also point to the fact that several measures of core inflation have been stable over recent months.
Last week euro was pressured below 1.34 for first time since November 2013. If the move continues, it should contribute to a pick-up of inflation over the medium term and give some comfort to the ECB.
The latest bank lending survey painted a picture of gradually improving loan environment that should slowly start to support the Euro-area recovery as well. In the second quarter loan demand was positive and credit standards were eased across the board. Improvement should be further supported by the oncoming ECB TLTRO’s, once the bank health checks (AQR & stress tests) are finished and the banks adequately capitalized.
ECB has also started to intensify preparatory work related to outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism. No major advancement should be expected from this front yet as the process is slow.
Low yields, weaker currency…
Long government bond yields are still flirting with all-time lows in euro area, something that the ECB’s message is unlikely to change. The ECB should also be happy with the recent FX moves, and does not want to break the euro weakening trend with less dovish comments.
Nordea