Week Ahead & in Review: ECB acts decidedly

Week in review: The ECB announced new purchases of sovereign bonds between March 2015 and September 2016, to take its total balance sheet size to just above EUR3tn, in line with the peaks of March and June 2012. With this new measure, the ECB hopes to fight the prolonged period of low inflation and boost growth, though President Draghi alerted to the fact that the ECB cannot act on its own and Governments need to do more to support trend growth. See our detailed analysis here.

Data released this morning suggests that the economy may have turned a corner in recent weeks, as the euro area composite PMI (activity indicator) edged up from 51.4 to 52.2. The manufacturing PMI rose from 50.6 to 51.1. This indicator surveys actual conditions in firms such as production, orders and employment and dos not include expectations. A value above 50 indicates growth, and below 50 points to contraction. The indicator has been flirting with the zero-growth threshold during the fall but is now recovering somewhat.

Meanwhile, the IMF has downgraded its world forecasts. GDP is now expected to rise 3.5 percent for 2015, revised down by 0.3 percent relative to four months ago, as the IMF expects the net benefit of plunge in oil prices will be more than offset by adverse factors, such as geopolitical risk, and the downturn in the euro area. In any case, risks to global growth are seen as being more balanced now, thanks to upside risks of lower oil prices, which suggests that there is less of a chance of further downward revisions to growth in the coming World Economic Outlook update in April.

Week ahead:

  • All eyes on Greek elections on Sunday, as Syriza is widely expected to win. The big question is whether they will have enough votes to form Government on their own. At this stage, the most likely scenario is of a coalition. Though Syriza has toned down its message, we should hear a lot more talk of debt restructuring in the coming months.
  • In the US, the Federal Reserve will meet on Tuesday, no rate hike expected yet. The minutes released a few weeks later l provide insight as to when the Fed expects to start raising rates. Low inflation and wage growth has been a source of concern.
  • On Friday, Q4 preliminary GDP growth will be published in Spain and in the US. European Confidence indicators, unemployment rate and inflation will be out. The data should confirm the view that the US and Europe are decoupling, with the US recovering fast and the euro area mired in weak growth and negative inflation. Markets expect US GDP growth of 3%qoq annualised and Euro area inflation at -0.5%yoy.