Tanguy Le Saout, head of European Fixed Income at Pioneer Investments, discusses the recent Central banks’ meetings, Europe’s growth outlook as well as current political issues and their impact on the markets.
1.Central Banks – Talking the Talk, but now have to Walk the Walk
In the last two weeks, we have had meetings of the ECB, US Federal Reserve (Fed) and the Bank of Japan (BoJ). At its October press conference, ECB President Mario Draghi surprised markets with his dovish outlook, appearing to signal that the new inflation forecasts to be published at the December meeting would pave the way for a further easing of monetary policy.
Draghi noted that all policy options are being discussed and that “there are no taboo’s”, suggesting that the possibility of things like corporate bond purchases could be on the agenda. Subsequent to the ECB meeting, the Fed meeting was more hawkish than market expectation, highlighting that December’s Fed meeting remained a live option for the first US rate increase in nearly 10 years.
Coupled with the lack of any action from the BoJ at their meeting last Friday, and slightly stronger Euro-area inflation numbers, the pressure has probably eased on the ECB to act aggressively. However, Mario Draghi may have painted himself into a corner with his dovish press conference comments.
Any back-tracking on his comments, or the announcement of a smaller package of measures than expected by markets, could lead to a higher Euro and a sell-off in bond yields, causing a tightening in monetary conditions. This is exactly what the ECB have been trying to avoid. Our best guess is that the ECB announce a package that meets market expectations, but some hawks on the ECB Central Council may well be unhappy with further easing.
2. Europe’s Growth Outlook
The German IFO Business Climate Index is a much-watched leading indicator for economic activity in Germany and is prepared by the IFO Institute for Economic Research in Munich. Each month, around 7,000 survey participants from firms representing Manufacturing, Construction, Wholesale and Retail are requested to assess their current business situation, as well as their outlook for the next six months.
Following the much-publicised problems in China and the recent Volkswagen scandal, the Index was expected to signal a big decline in sentiment. In fact, the October survey result showed only a minor fall from 108.5 to 108.2, and compared to expectations of 107.8. Why is this important?