Comment by Bart Hordijk, Monex Europe
In 2017 European Central Bank President Mario Draghi seemed like the central banker who had it all; the economy under his mandate was growing above potential, inflation was picking up and his biggest concern was whether all of this would strengthen the euro to the extent that this would hamper the exit from his Asset Purchasing Program. However, the recent months have been no exception in the vigorous plot twist that came about in 2018 and risks now continue to display their fine appetite for stacking up.
Since the latest ECB press conference on the 25th of October, core inflation has remained lackluster (chart 1), a weak Q3 economic performance has been confirmed and unrests on the streets of France threaten the Q4 growth in the Eurozone’s second largest economy. Evidently, sliding oil prices aren’t helpful for boosting inflation either while the “old” risks of escalating trade wars, a debt crisis in Italy and a chaotic Brexit still make sure they claim their spot on the retina of monetary policy makers. Finally, hopes of hawkish happenings remain reluctant to materialize into something more solid, as forward looking indicators are quick to burst this bubble. Purchasing Manager Indices tell a story of lower growth in the coming months, while business also report that inflation pressures remain subdued because competitive pressures limit the scope for transferring higher input prices on to consumers.
The question then becomes not whether Draghi will be dovish at the coming ECB conference – this seems almost as unavoidable as death and taxes – but how cautious he will be on Thursday. We think that speculations of an extension of the APP by for example 5 billion per month for three more months will prove unfounded. Nevertheless, Draghi will stress that inflationary conditions will need to improve, while risks to the economy need to lift, before the ECB will have its first rate hike. Therefore we expect that Draghi will drop some hints that he is comfortable with having a longer pause between the end of the APP and the first feat of Eurozone hiking action, potentially moving the market expectations of the first rate hike to the start of 2020. In our opinion, this is the likeliest way Draghi will deal with the dovish drift of the Eurozone economy.