Week Ahead & in Review: ECB disappoints the markets

Week in review: ECB disappoints markets: At this week’s meeting the ECB left rates unchanged as widely expected. At the press conference following the meeting, President Draghi struck a rather dovish tone saying that risks to growth remain on the downside and that the ECB will act swiftly to keep inflation expectations anchored in the medium term. In that respect, Draghi revealed that while low oil prices are a boost to economic growth, they could also have a sizeable impact on inflation expectations in the medium term, affecting wage negotiations and tightening monetary policy through higher real interest rates, which the ECB wants to avoid. Moreover, Draghi revealed that both growth and inflation expectations have been revised downwards relative to September, though they do not take into account the most recent decline in oil prices. Despite the dovish tone, markets were somewhat disappointed (the euro appreciated following the press conference) as they were expecting further details on the possibility of sovereign bond buying in early 2015. In that respect, President Draghi stated that the ECB could act without unanimity, quelling fears that the Bundesbank could derail further quantitative easing.

Meanwhile, the Bundesbank, Germany’s central bank, has revised down significantly its forecasts for the German economy to 1.4% this year, 1% in 2015 and 1.6% in 2016. In June, it had expected growth of 1.9%, 2% and 1.8 % respectively. These forecasts highlight fears that the European economy is at a standstill and decoupling from the US.

While downside risks to the euro area are building up, in the US, a net 321,000 jobs were created in November, well ahead of analysts’ forecasts of 230,000, while the unemployment rate stayed at 5.8 per cent, in line with expectations. It was the biggest jobs gain in nearly three years and the 10th consecutive month that the US economy has generated 200,000 or more jobs. Today’s numbers will no doubt reinforce expectations that the Fed begin raising interest rates before mid 2015.

Week ahead: Thin week in terms of data. However, the OPEP and IEA will release their monthly reports on oil and energy during the week, their supply and demand forecasts are of particular interest against the background of falling oil prices

  • Thursday 11 December: Portuguese inflation: market expectations are for flat inflation yoy after several months of declines
  • Friday 12 December: Euro area industrial production for October will be released. Markets expect a the yoy rate to remain unchanged at 0.6%, a very meager rate