SAO PAULO | By Marcus Nunes via Historinhas | In The Risks to the Inflation Outlook SF Fed researcher Vasco Cúrdia writes: the median inflation forecast is not expected to return to the FOMC target of 2% until after the end of 2016. The uptick in inflation in the first half of 2014 could lead one to believe inflation is finally on the path back toward its target. However, inflation has shown similar patterns several times before and each time the uptick has never lasted very long. According to this model, we should not see inflation begin to recover more firmly until around the end of 2015.
MADRID | The Corner | In a report by Atradius Credit Insurance, they say that the disinflationary trend is visible across the Eurozone, but not all countries are expected to face the same issues. Countries that have a large output gap and those that still have to implement the most reforms will face the highest disinflationary pressure. To create a list of the countries most likely to be impacted, we first select the Eurozone markets that have a budget deficit larger than 3.0%, as these are subject to the Excessive Deficit Procedure which forces them to implement fiscal and structural reform.
MADRID | The Corner | Gloomy inflation data in the eurozone prompted a debate about recovery losing momentum. But while tackling disinflation should be a priority, we shouldn’t be too worried about growth. “Leading indicators of growth are not – at present – consistent with any major slowdown in the world economy. Indicators of financial and monetary conditions and many industrial metal prices are relaying a similar message,”analysts at UBS commented on Thursday.
VIENNA | By Keith Weiner via Truman Factor | The European Central Bank again cut the interest rates it controls. Notably, the deposit rate was moved deeper into negative territory. It is now -0.2% (minus 20 basis points, that is not a typo). The ECB says it’s trying to nudge prices higher, but it’s actually feeding the cancer of falling interest. The linked article above, like most, is focused on the quantity of euros and the presumed direct relationship to price. The following bit of editorializing from that article is uncontroversial in Frankfurt, London, New York, Mumbai, or Shanghai.
LONDON | The Corner | According to experts at Barclays, the significant depreciation of EUR/USD (Fig 1) has been a key data event in the past few months. However, the sharp fall in oil prices has partially offset this positive effect on inflation, which has remained at 0.4% y/y in August. The inflation data remain crucial for the ECB, which has repeatedly emphasised that there is unanimous commitment to use all available tools to prevent a period of prolonged low inflation. We now expect QE on sovereign bonds, most likely by Q1 15.
MADRID | J.P. Marín Arrese | Eurozone policy makers depict sluggish growth and low inflation as two sides of the same coin. This approach fails to grasp the subtle distinction between the two. Muted inflation undoubtedly stems from faltering demand linked to current stagnation. Yet it also reflects the ongoing real adjustment. Reviling it as the main wrongdoer, rather than treating it as a collateral victim, utterly misses the point in enforcing effective policy.
MADRID | The Corner | The expectation that the ECB will finally announce a QE program after Draghi’s words at Jackson Hole and the confirmation that the ECB would have hired Blackrock for advice on launching a ABS program continue to nurture the Eurozone bond rally and thereby the credit one. Yesterday many bond markets in Europe returned to record lows with improvements in 10 years of 3bp (Germany), 2.5bp (Spain) and 2bp (Italy).
MADRID | The Corner | Although it is not part of ECB’s mandate, last Friday in Jackson Hole, President Mario Draghi spoke about what needs to be done in the euro area to address the problem of high unemployment and weak economic growth. As Barclays analysts believe, the speech “represented a significant breakthrough in the ECB rhetoric and will probably have significant implications regarding the debate just about to start between European government on policies that need to be deployed to avoid a ‘triple-dip recession’ and a fall in outright deflation.”
MADRID | The Corner | The fall in inflation in July to 0,4% YoY and a still high unemployment rate of 11.5% in the Eurozone show that the policy measures the ECB announced in June are going to take some time to reach the real economy.
LONDON | By Antonio Garcia via Barclays | Stronger-than-expected July PMIs suggest that the growth outlook is likely to improve in Q3 and are consistent with our forecast of 0.4% q/q. EA public debt levels have reached a new peak in Q2 14 at 96.4% of GDP, with three of the four largest EA economies above the EA average. We now expect July HICP inflation (next week) to edge down to 0.4% y/y and August inflation to decline further, to 0.3% y/y.