MacroScope

ECB aftermath; how firm is opposition to QE?

After the European Central Bank opened its toolbox and deployed pretty much everything it had left, bar printing money, the question is if and when QE becomes a live possibility.

ECB chief Mario Draghi pointedly said at his monthly news conference that all policy options had not been exhausted.
German resistance to such a move will remain, however, and Draghi’s deputy, Vitor Constancio, has already intimated that it will take until late this year to judge whether the latest gambits have made a difference before moving onto the next stage.

Bundesbank chief Jens Weidmann is already out today saying the ECB has ventured onto new ground and that governments need to treat the move as a wake-up call to continue with economic reforms. He added that there was a risk that long-term inflation expectations could be de-anchored – ECB speak for deflation.

ECB policymakers Benoit Coeure and Yves Mersch, who can be reasonably said to represent differing ends of ECB opinion, both speak later today as does Finnish central bank chief Erkki Liikanen.

One to ponder: By no longer offsetting the government bonds the ECB bought back during the debt crisis by taking in an equivalent amount in bank deposits each week -  non-sterilisation in central bank jargon – has Draghi essentially crossed the Rubicon in terms of creating money and does that mean the philosophical objections to full-on QE have been surmounted?

Euro zone inflation data to set seal on ECB action

Euro zone inflation – due at 0900 GMT – is forecast to hold at a paltry 0.7 percent in May, in what European Central Bank President Mario Draghi has labelled the danger zone below 1.0 percent for the eighth successive month.

After German inflation fell to just 0.6 percent on the EU measure on Monday, well below forecasts, the bloc-wide figure could also undercut. We already know the Spanish and Italian inflation rates were just 0.2 and 0.4 percent respectively last month. If that comes to pass, any doubts about ECB action on Thursday, which are thin on the ground anyway, must surely be banished.

A clutch of senior sources have told Reuters the ECB was preparing a package of policy options for its meeting on Thursday, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).

Signs of European dash for growth

The ripples of EU election results are being felt, no more so than in France where the National Front topped the poll.

The day after the results, Prime Minister Manuel Valls promised further tax cuts for French households. The government is already committed to a 30 billion euros cut in labour taxes to help business but insists all this can be done while meeting its EU deficit commitments.

Brussels has already given Paris an extra two years to get its deficit down to three percent of GDP. Today, the European Commission will produce updated country recommendations.

Gas talks resume

Fresh talks between Russia, Ukraine and the European Commission in Berlin will aim to resolve a gas price dispute that Moscow has warned could make it cut off supplies next week.

Ukraine has said the price for 2014 should be agreed before it starts making any payments. Russia’s energy minister has said Moscow and the EU have proposed that Kiev pay Gazprom $2 billion, and another $500 million before June 7, as a precondition for a price discount and further talks.

Gazprom said on Thursday it had not yet received any payments from Ukraine on a debt which it says will have risen to about $5.2 billion by June 7 unless Ukraine begins to pay it off. Kiev has countered that Gazprom owes it around $1 billion for gas following Russia’s seizure of Crimea.

PMIs next signpost for ECB

Following a mixed bag of euro zone GDP data last week which showed Germany charging on and Spain holding its own but France stagnating and Italy, Portugal and the Netherlands slipping back into contraction, flash PMI surveys for the euro zone, Germany and France certainly have the power to jolt the markets today.

As things stand, there seems little to dissuade the European Central Bank from loosening policy next month. Five senior sources told us it was  preparing a package of policy options for its early June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.

Bundesbank chief Jens Weidman speaks later. He told a German newspaper it was not yet certain that action would be taken in June. The three PMI readings are not expected to move much from April with the French numbers lagging those of the euro zone and Germany.

Putin desperately seeking gas deal

Ukraine seems to be in something of a holding pattern before Sunday’s election though the question of how those polls can be securely conducted in parts of the country where pro-Russian rebels want to secede remains a very live one.

We reported yesterday from Donetsk where officials working to prepare for the May 25 presidential poll described intimidation and threats from separatists which prompted them to shut down their office. The interior minister in Kiev has said it would be impossible to hold “normal elections” in the regions of Donetsk and Luhansk which are home to nearly 25 percent of the electorate.

Moscow said yesterday that President Vladimir Putin had ordered Russian forces near Ukraine’s eastern border back to their bases, though NATO and the United States said they saw no sign of a pullback.

Why EU elections can matter

Some interesting action over the weekend: in a foretaste of this week’s EU elections, Greece’s leftist, anti-bailout Syriza party performed strongly in the first round of local elections on Sunday, capitalizing on voter anger at ongoing government austerity policies.

If it did even better in the EU polls it could threaten the ruling coalition and tip Greece back into turmoil just as there are signs that it has turned the corner.

Bank of England Governor Mark Carney sounded dramatically more alarmed about Britain’s housing market, saying it posed the biggest risk to the economy and harboured deep structural problems.

France flatlining

We get a flood of EU GDP reports today. Germany’s figure, just out, has marginally exceeded forecasts with quarterly growth of 0.8 percent but France is underperforming again and stagnated in the first three months of the year, missing estimates of 0.2 percent growth.

Robust German growth has been driven largely by domestic demand, which could help its European peers with their exports. Where all that leaves the overall euro zone figure, due later, remains to be seen. The bloc is predicted to have expanded by 0.4 percent.

Spain has already come in with 0.4 percent quarterly growth and others could pick up too so once again France is looking like one of the sicker men of Europe. High debtors Italy and Portugal are expected to eke out at least some growth.

Strong euro may be a monster Draghi can’t tame

Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in FrankfurtECB President Mario Draghi may have created a monster when he declared nearly two years ago that he will do “whatever it takes” to save the euro.

Given that Draghi has now openly pegged the outlook for monetary policy at least partly to the exchange rate, the prospect of both short-term and long-term investors buying the euro is a worrying obstacle for policy.

A rampant euro is anathema to the ECB’s narrow mandate, which is aimed squarely at getting very low inflation back to its target of just below 2 percent. A stronger euro keeps a lid on the price of everything the euro zone imports from abroad. And it makes everything it exports seem relatively more expensive.

Ukraine fissure

Pro-Moscow rebels declared a resounding victory in Sunday’s referendum on self-rule for eastern Ukraine, with some saying that meant independence and others eventual union with Russia. On the ground, fighting appears to be getting increasingly out of control.

The EU declared the referendum illegal but separatist leaders in eastern Ukraine may use the vote to formalise a split with Kiev. Nearly 90 percent of voters in Donetsk, the larger of two eastern regions where a plebiscite was held, voted for self-rule, the head of the separatist election commission there said.

There are signs of alarm even in Moscow with Vladimir Putin calling last week for the referendum to be suspended, perhaps fearing tougher sanctions from the West. Washington and the EU have set any disruption of Ukraine’s May 25 national election as their red line. Putin has belatedly given rhetorical support to that vote. Whether it can legitimately take place given the chaos in parts of the country remains an open question.