Are the ECB and the Data Going Different Directions?
There has been a lot of news going on in the world outside of Europe this week, but that doesn’t mean things haven’t been happening to impact the outlook for the Euro. Many members of the ECB’s monetary policy board gave interviews to the press. A lot of their comments were generally dismissed because they were repeating positions that were already known. And there were bigger events in the US, UK, and Japan among others to focus on.
But, in the context of the data points that have been coming out recently (and some of the forecasts), the comments might have heightened relevancy. Namely, that as the ECB generally trends towards keeping rates as they are, the data for the Eurozone has under performed. Which could leave the central bank out of step from the economic reality on the ground. With the market’s attention elsewhere, that might mean a sudden correction if or when it’s addressed.
What Happened?
On Thursday, the EU Commission published its winter forecast, which included its outlook for key economic indicators in Europe for this and the next year. It largely did not get a mention, but it could be influential for future monetary policy. Particularly in light of what has happened in the economy recently.
The Euro Area avoided falling into a recession in the second half by the bare minimum. This wasn’t thanks to an uptick in economic growth, but because the third quarter results were revised slightly higher than previously expected. This is the second time in a year that this particular kind of revision happened. The first quarter data was revised up from negative, allowing the Euro Area to avoid a technical recession in the first half of the year as well.
The Not So Rosy Outlook
The EU Commission cut its growth forecast for the Euro Area from 1.2% to 0.8% for this year. All the major economies saw their growth forecast cut, but the lion’s share of it was from Germany. The EU Commission sees Germany growing at just 0.3% next year.
With less economic activity comes less inflationary pressure, the CPI change for the period was cut to 2.4% from 3.2% prior. While that’s still above target, it’s also an average. Which means that the ECB’s view of inflation not coming down to target until next year might be modified to reach its objectives sooner.
The Market vs the Central Bank
Despite the protestations of ECB members that it’s too early to discuss rate hikes, the market has gone ahead and priced in 150 bps of easing for this year. That’s the equivalent of 6 rate cuts, if they are done at just a quarter of a point at a time. The market believes those cuts will start in April. Economists are a little more patient, with the majority saying the first easing will happen in June.
If the European economy remains stagnant, it will be logical to expect inflation to come down faster than anticipated. It might mean that the ECB could be getting really close to the time it starts to admit that rate cuts are coming. And with the dollar gaining on postponed rate cut expectations, the EURUSD could get some downward traction.
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