Europe | FX | Monetary Policy & Inflation | Rates
The terminal decline in Euro-area growth appears to have stopped. The latest batch of European manufacturing PMIs show upticks for Germany and France and a stable print for the Euro-area. Services data also has gone sideways. The larger question is whether the decline for the US has stopped. The Markit PMI survey appears to indicate yes, but the more robust ISM survey has yet to show this (next Friday’s release is important in this regard)…
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The terminal decline in Euro-area growth appears to have stopped. The latest batch of European manufacturing PMIs show upticks for Germany and France and a stable print for the Euro-area. Services data also has gone sideways. The larger question is whether the decline for the US has stopped. The Markit PMI survey appears to indicate yes, but the more robust ISM survey has yet to show this (next Friday’s release is important in this regard).
The relative PMIs between the Euro-area and the US therefore has been improving in favour of the Euro since Q2. Coincidently, the euro has also shown stronger longer-term momentum since then too (see chart). As for short-term dynamics, the euro has bounced in October, which is likely due to easing of trade war uncertainty and perhaps more importantly improved Brexit dynamics. Together the relative growth picture and trade picture suggests more stability in the euro, rather than weakness.
As for the ECB, new ECB President Christine Lagarde has a challenge. Draghi has left her with an exhausted monetary policy stance – rates are negative and QE is in place. Her options for further easing will be limited. More fundamentally, markets believe real policy rates will be negative as far as the eyes can see (see second chart). This doesn’t fit well with ECB credibility.
While some think she can engineer fiscal easing, that decision belongs to German politicians, not her. Instead, she will likely follow the path of Japan in more experimental asset purchases. The BoJ targeted equities or real estate, she could focus on climate change related assets. The next target for ECB purchases is therefore the big question for investors. It pays to follow the central bank.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)