The Good News Out Of Europe Could Be A Headache For The ECB
Earlier today, the preliminary (Flash) PMI reports across Europe continued to confirm that the eurozone economic recovery is real.
"As they stand, PMI indices look consistent with ongoing activity expansion in H2 in core countries and thus in the Eurozone as a whole," said Credit Agricole's Frederik Ducrozet. "With the usual caveats in mind, including empirical evidence that monthly changes in PMIs, not only levels, matter for growth, composite PMI indices would be consistent with quarterly GDP growth of around +0.2-0.3% QoQ in the Eurozone in Q3 (following +0.3% in Q2), +0.5% QoQ in Germany (down from +0.7%) and 0.0-0.2% in France (down from +0.5%), roughly in line with our current forecasts."
But Ducrozet warns that good news may be bad news for the European Central Bank (ECB). From his note to clients:
At the same time, it may become increasingly difficult for the Governing Council to convince the market that the newly adopted forward-guidance will mean policy rates will remain low (or lower) for an extended period of time. Eventually, below-target inflation should provide the ECB with the most natural fundamental argument to back its position, but more clarity could be needed should the relative decoupling between US and Euro bond markets break down. We have long argued that the ECB would act to prevent such a passive tightening to negatively affect Eurozone growth, and indeed, if need be, there are still plenty of tools at its disposal to buy more time, including rate cuts (less likely now than before the summer), a more specific time horizon or quasi-thresholds for its forward guidance, or additional liquidity management measures conveying the idea that rates will indeed remain low for longer than what standard reaction functions would imply (including, for instance, the implementation of another ultra-long refinancing operation at fixed rate). Time will tell whether the ECB needs to react, but in the meantime the Governing Council will have to deal with the uncomfortable idea that not all parameters are under its control.
