September 04, 2015


Everyone is suddenly getting very pessimistic

When Peter Praet said the eurozone was in danger of missing its inflation target, he clearly foreshadowed that the staff macroeconomic forecasts would be revised downwards because the previous one from July produced a shockingly optimistic economic outlook for the eurozone, which did not make sense to us at all.

The overall assessment of the ECB's staff projection is a lot more cautious than it was in July. For us the most important revision concerns the 2016 numbers, especially the one for HICP inflation, which is down from 1.5% to 1.1%. The 2017 numbers have been revised down only from 1.8% to 1.7%, but it is easy to see why that is so. The ECB's forecasting models for GDP and inflation are hard-wired to forecast a return to trend. There seems to be no learning algorithm in them either. They have been wrong year after year, and keep on being wrong year after year. The 2017 numbers are thus entirely meaningless. What matters, however, is that the ECB has announced a large downward revision of inflation over the relevant forecasting horizon within the space of only three months. This is particularly meaningful for the future of the QE programme. Under the July projections, the ECB could have argued - just - that they were on the trajectory towards a return to the target. With inflation projected at 1.1%, such a statement would be impossible.

The big news from the governing council yesterday is the increase in the issue limit of the Public Sector Purchase Programme  from 25% of 33%, though with no changes to the issuer limit which remains at 33%. Mario Draghi said there was no discussion on an extension or increase of the QE programme itself - but we presume that this is simply because it was not on the agenda. The increase in the share limit will make it easier for the ECB to micro-manage its purchases. The original 25% was chosen to ensure that the ECB does not have the power of a blocking vote.

The IMF, meanwhile, has called on the leading central banks to hold off from raising interest rates for now, Frankfurter Allgemeine reports. The IMF made its comments in a paper ahead of the G20 finance ministers' meeting in Ankara this weekend. The main message is that the slowdown in China is having a larger effect than expected. Emerging markets have also become more vulnerable, and there is virtually no productivity growth in the advanced economies. The IMF urged the Fed not to go for a premature rate increase for as long as there is no hard evidence of meaningful wage and price pressures. And for the ECB the message is to extend the QE programme. In other words, everyone is fairly pessimistic now.

The only hard data in yesterday were eurozone retail sales sales, which rose by a little less expected, 2.7% yoy, and 0.4% mom. The time series is telling us that the recovery is clearly under way, but also that it is not very strong. 

As you can see from our data table below, the reaction of both the euro and several sovereign bonds to yesterday's announcements and projection has been robust, the euro was down against the dollar, as were both core and periphery sovereign bond yields.

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