Is the ECB worried about the low inflation environment?  YES!  Does it know what else to do from a policy perspective to spur real growth and inflation?  NO! 

As no surprise, the ECB kept its main interest rates on hold today:  

  • Main Refinancing Operations unch at 0.00%
  • Marginal Lending Facility unch at 0.25%
  • Deposit Facility unch at -0.40%

The ECB also kept its bond purchasing program (QE) unch with a target of €80 billion per month and stated that its Corporate Sector Purchase Program (CSPP) will commence on June 8th.  Rejoice!?

Today’s presser revealed more of the central bank speak we’ve come to expect from Draghi.  He again talked about using all available policy instruments in the ECB’s tool kit and reiterated that he “stands ready, willing, and able” to support the economy, underlining that the Bank sees its bond purchasing program proceeding “smoothly” with “no limitation in liquidity” and availability of bonds for purchase.  #We’reAllGood!

But under the hood conditions aren’t so rosy!  Our call of #EuropeSlowing remains firmly planted. While Q1 2016 Eurozone GDP “surprised” to the upside at +0.5% Q/Q, our proprietary Eurozone GIP (growth, inflation, policy) model below shows a shift into Quad 4 (equating to growth slowing as inflation decelerates) in the back half of this year. 

We expect this shift to increase downward pressure on economic fundamentals, and for the full year 2016, we expect Eurozone GDP to grow 1.2% Y/Y (below consensus) with CPI mostly in-line with consensus at 0.3% Y/Y.

ECB Heads Into the Summer – Expect More of the Same from Draghi! - EUROZONE

Additionally, we think the ECB’s quarterly Staff Projections (updated in today’s presser) are far too optimistic.  The staff essentially straight-lined GDP at 0.5% quarterly into 2018, and stretched inflation to near 2.0% by 2018 – a pipe dream in our opinion as all policy measures thus far have proven inadequate to move inflation off the zero bound and yield growth to the real economy.  See the ECB’s charts directly below.

ECB Heads Into the Summer – Expect More of the Same from Draghi! - ECB Staff Projections

According to the ECB’s staff projections it sees 2016 GDP and CPI increasing above previous estimates in March with inflation taking a huge leg up from +0.2% in 2016 to 1.3% in 2017!  #GoFigure!

  • Eurozone GDP Projections at 1.6% Y/Y in 2016 (vs March projection of 1.4%), 1.7% in 2017 (unch vs prior) and 1.7% in 2018 (vs 1.8% prior).
  • Eurozone CPI Projections at 0.2% Y/Y in 2016 (vs March projection of 0.1%), 1.3% in 2017 (unch vs prior) and 1.6% in 2018 (unch vs prior).


Big Bang Theory Intact.  We’ve coined the term Big Bang Theory to underline that after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.  This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone.

Weighing the Euro.  We’re recommending an immediate term TRADE risk range of $1.10 to $1.12 on the EUR/USD and have a bearish bias on the cross over the intermediate term TREND as the Fed’s Janet Yellen sounds poised to raise the Fed Funds Rate in the coming weeks and with it put support under the greenback.

ECB Heads Into the Summer – Expect More of the Same from Draghi! - Neu EUR.