Europe Economic Weekly Let’s be constructive

Ruben Segura-Cayuela, Chief European Periphery Economist - Viernes, 26 de Septiembre

• 
• 
• 
• 
• • 
  • 
  • 

Data remains weak but still consistent with soft positive growth in Q3, although risks keep getting more biased to the downside and soft data is still to turn around. Meanwhile we keep waiting for the bottom on inflation (hopefully in September) but downside risks are not receding. Despite that, we expect the ECB to provide details on ABS-CB purchases and to go for constructive ambiguity in both the size and duration of the programme given that the ABS-CB programme is probably not fully developed and there are a number of pending regulatory developments that could impact the potential size and design of the programme.  Any mention of size and timing, unless it is very large in volume and long enough to be viewed as nearly opened ended by the market, could be interpreted negatively by the markets.

Draghi has created, in our view, two communication challenges recently. First, at Jackson Hole he focused attention on the 5Y5Y inflation forwards, which is now even lower. He also suggested a balance sheet target, which the markets questioned whether the ECB could achieve after the first TLTRO take-up. For the moment, we expect Draghi to avoid these issues by arguing that the September and December TLTROs should be assessed together with the purchases of private assets, and that these measures, will help achieve the ECB’s mandate, and that the central bank stands ready to act further if it does not. He could become more explicit in suggesting that further disappointment in TLTROs could be compensated by larger asset purchases, leaving ample room for manoeuver. There is certainly a large enough stock of assets for the ECB to try to remove some of the market skepticism regarding the balance sheet increase. Our skepticism is not about whether the expansion can be reached, but rather about whether the program can be designed in a way that can have a strong impact on the economy.

Other than that:

1.    For September, Euro area inflation should stay pretty much flat, from 0.37% yoy in August to 0.35% yoy in September. This should be driven by core falling to 0.8% yoy from 0.9% yoy as the calendar effects discussed above fade away. The more volatile components should contract at a slightly lower pace. Hence, in September we expect the lowest inflation rate since November 2009. Inflation should then bottom out, but the likelihood of further downside still appears high. Market-based measures of inflation expectations keep coming down, even after the announcement of ECB measures in September.

2.    The path of rate rises vs reversing QE: If the BoE wanted to pause interest rate rises after an initial couple of hikes to assess the impact, Autumn and Winter next year might be an opportune time, as various QE Gilts mature then.

Click here for full report*

 

Europe Economic Weekly

Let’s be constructive

The weekly view: Another week, few changes 

Data remains weak but consistent with soft positive growth in Q3. Meanwhile we are still waiting for the bottom on inflation (hopefully in September). We expect the ECB to provide details on ABS-CB purchases. 

Euro area: ECB: Constructive ambiguity? 

We expect the ECB to go for "constructive ambiguity" in both the size and duration of the ABS-CB program, but it could become more explicit in suggesting that further disappointment in TLTROs could be compensated for by larger asset purchases.  

UK: The path of rate rises vs reversing QE 

If the BoE wanted to pause interest rate rises after an initial couple of hikes to assess the impact, Autumn and Winter next year might be an opportune time, as various QE Gilts mature then. 

Peripheral watch: Spain: new GDP series in Spain 

The new GDP series based on ESA 2010 lifted nominal GDP by 3.2% in the base year. This should lower the budget deficit by 0.2ppt this year and next, but does not lessen the challenges for Spain's public finances. 

The week ahead: 

Next week, we expect euro area headline inflation to be flat at 0.35% yoy with core inflation to edge down to 0.8% yoy. Moreover, composite PMIs for Spain and Italy should decline marginally. 

Date	GMT	Country		Data/Event		For	BofAML		Cons.†	Previous
29 Sep	09:30	UK		Net consumer credit (£)		Aug	0.7bn		--	1.1bn
29 Sep	09:30	UK		Net lending sec. on dwellings (£)		Aug	2.4bn		--	2.3bn
29 Sep	09:30	UK		Mortgage approvals		Aug	67k		--	66.6k
30 Sep	00:05	UK		GfK Consumer Confidence		Sep	-1.0		--	1.0
30 Sep	09:30	UK		GDP (qoq, F)		2Q	0.8%		--	0.8%
30 Sep	09:30	UK		GDP (yoy, F)		2Q	3.2%		--	3.2%
30 Sep	09:30	UK		Index of Services (mom)		Jul	0.2%		--	0.3%
30 Sep	09:30	UK		Index of Services 3M/3M		Jul	1.0%		--	1.0%
30 Sep	10:00	Euro area		Unemployment Rate		Aug	11.5%		11.5%	11.5%
30 Sep	10:00	Euro area		CPI Estimate (yoy)		Sep	0.4%		0.3%	0.4%
30 Sep	10:00	Euro area		CPI Core (yoy)		Sep	0.8%		--	0.9%
01 Oct	09:00	Euro area		Manufacturing PMI (F)		Sep	50.5		--	50.5
01 Oct	09:30	UK		Manufacturing PMI		Sep	53.5		--	52.5
02 Oct	12:45	Euro area		ECB Main Refinancing Rate		Oct	0.05%		0.05%	0.05%
02 Oct	12:45	Euro area		ECB Marginal Lending Facility		Oct	0.30%		0.30%	0.30%
02 Oct	12:45	Euro area		ECB Deposit Facility Rate		Oct	-0.20%		-0.20%	-0.20%
03 Oct	09:00	Euro area		Composite PMI (F)		Sep	52.3		--	52.3
03 Oct	09:30	UK		Services PMI		Sep	59.0		--	60.5
03 Oct	10:00	Euro area		Retail sales (yoy)		Aug	0.9%		--	0.8%
Source: BofA Merrill Lynch Global Research, Bloomberg, Reuters, Central banks

 

[Volver]