Week Ahead: ECB opens door to further measures

Week in review: The ECB left rates unchanged at record lows today as anticipated by the markets, but was more dovish than expected, hinting more decidedly at further action on the quantitative front. In the press conference following the Council meeting, President Draghi reported in the initial statement that the current purchasing programmes (Asset-Backed Securties and Covered Bonds) will be in place for two years, that the ECB plans to expand its balance sheet up the the level of early 2012 (i.e. by EUR 1tn) and that the ECB staff have been tasked to prepare further measures which can be implemented if needed.

Markets have reacted by pushing the euro lower, as they anticipte that the ECB may start buying sovereign debt as son as in December, when the ECB staff update their forecasts and if the outlook for growth and inflation remains very weak. Data on GDP in the coming week should confirm that the Euro area has stagnated, adding further pressure to the ECB.

Meanwhile, German industrial production was up 1.4%mom in September after -3.1% in August, relieving fears that the growth engine of Europe could be heading towards recession. In any case, data is still consistent with a significant slowdown if not stagnation in Q3.

In Portugal, the unemployment rate fell to 13.1% in Q3 down 0.8 p.p qoq and 2.4 p.p. yoy mostly on the back of a rise in employment, which was up 50.5 thousandqoq and 95.7 th. yoy. The IMF and the European Commission downgraded their forecasts for growth in Portugal in 2014 and 2015, and, importantly, expect the deficit to exceed 3% in 2015 (the Government has projected 2.7%) on the back or more conservative assumptions on revenue collection. This means that Portugal may not leave the excessive deficit procedure.
In the US, the economy added 214 thousand jobs, a tad less than consensus, but with backward revisions adding a furter 30 thousand in previous months. As the economy recovers, even though there are no signs that wage inflation is picking up, the Fed may be tempted to hike rates as soon as the spring.

Week ahead:

  • Wednesday 12 November: September Industrial production in Portugal and in Europe
  • Friday 14 November: Q3 GDP in the EU and several member states. Markets expect the Euro area to stagnate, as well as Germany and France.