Week in Review & Week Ahead: Low inflation may fuel discussion on ECB bond buying

Week in Review: Confidence indicators stagnate in Europe in October.

The Economic Sentiment Indicator (ESI) was broadly unchanged in October in several European countries, reinforcing the stagnation trend recorded in 2014 after the sharp increase in confidence in 2013. In the Euro Area, the ESI rose 1 point to its long-term average level. In Portugal the ESI recorded a more significant change, rising 1.5 points to 103.1, 1.4 points above its long-term average.

Flash inflation for the EA was 0.4%yoy as expected. Inflation excluding energy was estimated at 0.7%. The ECB has started fighting-off this protracted period of low inflation with quantitative meaures, such as buying asset-backed securities and covered bonds. However, these measures have attracted little interest from investors in October.

The Eurostat also released September’s unemployment rate, reporting no changes in the EA (11.5% of the labor force, the same as in July and August) and a new drop in the Portuguese unemployment rate to 13.6% after 13.9% (702 000 unemployed). Spain’s unemployment rate continues high at 24%, though down 0.2 pp from the previous month and 2.1 pp from September 2013.

Portugal fell two places, from 23 to 25 in 189 countries, in the Doing Business Ranking in 2015. Nevertheless, Portugal ranks fairly well, when compared with other European economies such as the Netherlands (ranked 27), France (ranked 31) and Spain (ranked 33). Portugal’s position has improved relative to the years before 2010, however, data is not comparable as significant methodological changes were introduced in 2014 and 2015. Read our full comment here.

Week Ahead: The ECB will hold its policy meeting on Thursday. Given that inflation remains very low and the take-up of the ECBs new measures is erlatively low, the ECB is likely to discuss whether to further intensify its quantitative programme, buying Government debt. No action is likely at this stage, as opposition to such a measure remains high. In the US, the all-important employment report will be out on Friday. Markets anticipate employmentto continue to rise.

  • 4 November (European Commission): New forecasts for Europe will be released. In the case of Portugal, we will watch out for the deficit forecast, the first since the end of the adjustment programme
  • 5 November (National Statistics): Portuguese Q3 employment data: the unemployment rate was 13.9% in Q2 and it is likely to fall again in Q3, though the decline may be more moderate
  • 6 November : ECB meets
  • 7 November (Bureau of Labor Statistics): US Employment Situation – October: includes Non-farm payrolls, which is the most watched data point in the markets. Consensus is for a 235 thousand rise in employment