The Rearview Mirror: May 2017


rearview mirrorEven if the outcome of the first round in France election revitalized a call for a less dovishness in Draghi’ speech, the monetary policy stance remained unchanged at the ECB meeting on Thursday the 27th of April. It was in the end a financial non-event.

The EuroDollar in fact fluctuated between 1.093 and 1.085 in line with two main messages coming from the news conference: from one hand, Mr Draghi highlighted that the recovery in the Eurozone is “increasingly solid” but on the other hand he expressed some concerns on the prospect of consistently rising inflation.

Then the President Mario Draghi is still considering as necessary a “continued very substantial degree of monetary accommodation”. He acknowledged the support of stronger data, he also reduced downside risks but since underling price dynamics pressure remain subdued, he is postponing to amend its easing biases late in June or July.

draghi2_2296864bDuring the press conference, Mario Draghi reiterated that the Governing Council is in charge to discuss about policies and not politics albeit the political uncertainty is a theme that they are taking into consideration because of the power of affecting the medium-term outlook.

Overall even if any substantial hawkish messages were absent, this meeting could be considered as a preparatory work that opens to future policy normalization.

The inflation report that came out on Friday (only one day after the ECB meeting), together with another report that is attesting that M3 money supply is expanding at the fastest rate since the crisis of 2008, are providing us a slightly different picture.

inflationThe current scenario, if confirmed, can help Draghi to move on in the direction of a tapering. Let’s have a look at the inflation figures and then back again to analyze Mr Draghi uncomfortable position.

More specifically, core price growth, a measure that excludes food and energy, speed up to 1.2 percent in April. Statistically speaking we need to go back before June 2013 to see a pronounced reading like the latest one.

A part from the volatility of inflation data, surely it will be an interesting topic for the upcoming weeks. I would likely expect a reinforced criticism coming from those nations as Germany, Netherlands or Austria. For this reason any supportive data for a less accommodative monetary policy would be helpful for Mr Draghi to be committed with a change in his narrative. On the other side if we have a look at the price action of different assets likes the 10yr Bund yield or the Euro, we soon realize that there is still a bit of uncertainty priced in. The lack of clarity from central bankers is helping stabilizing price movement of main asset classes, but it is just delaying the problem to be faced.


Christian Zorico: LinkedIn Profile

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