Week Ahead and in Review: More optimistic ECB

Week in review: ECB’s President Draghi struck a more positive note this week, as he noted in the press conference following the monetary policy meeting that though downside risks to economic activity persist, they are diminished thanks to monetary policy decisions and the fall in oil prices. Mario Draghi also stressed that the risks of a deflationary spiral were lower since the ECB announced its quantitative easing programme, probably referring to the fact that the 5y5y inflation expectations picked up significantly since 22 January. The staff forecasts reflect this optimism. Euro area mid-point forecast for GDP growth is for 1.5% in 2015 (1% in the previous forecast), 1.9% in 2016 and 2.1% in 2017, in line with the euro area long term growth. Inflation is seen at 0% in 2015 but rising to 1.5% in 2016 and 1.8% in 2017, in line with price stability.

Turning to the details of the QE programme, it is due to start in 9 March. The ECB is expected to buy 850bn worth of sovereign bonds between now and September. Besides the limits in terms of sizes of purchases relative to the issuer and single issue already announced last month, the ECB has also specified it will not buy assets trading at negative yields below -0.2%, effectively setting a price ceiling for QE.

Datawise, the details of euro area GDP show that the major contribution to the Q4 rate of 0.3%qoq came from exports (+0.4 p.p.) and household consumption (+0.2 p.p.), while stock building was a drag.  German IP was up 0.5% mom (0.9%yoy) in January, the fifth consecutive rise. The data should reassure markets and policy makers that the recovery is broadening, ahead of the ECB’s plans to buy sovereign debt.

In the US, non-farm payrolls were up 295k in December, and the unemployment rate fell to 5.5%. However, average earnings remain muted, rising 2% in the whole of 2014. Together with low oil prices, this may lead the Fed to delay a first rate hike. Markets expect the first one before mid-year.

Week ahead:

  • Wednesday 11 March: Portuguese CPI inflation is released: inflation is due to remain in netaive territory (it was -0.4%yoy in January) as oil prices remain well below their level one year ago. However, stronger domestic demand should be reflected into a graduall strenghtening or core inflation
  • Thursday 12 March: Euro area industrial production should rise in January, after strong figures in Germany