What is truth?

As Eurostat surprisingly reported earlier today, Europe has once again descended into deflation, and not just due to sliding energy prices but also in the core inflation rate, which strips out the volatile items of energy, food, alcohol and tobacco, and which was also weak falling to 0.8% from 1%.

 

Still, as Reuters observes, “although consumer spending, virtually the only engine of growth, is holding up relatively well, an array of weak business sentiment surveys and poor PMI data indicate that the 19-member currency bloc is increasingly suffering from the emerging markets slowdown.”

As a result, today’s deflationary report, the worst since the start of Europe’s QE, virtually assures another substantial round of policy easing from the European Central Bank on March 10.

Nordea economist Holger Sandte, cited by Reuters, said that “deflation would be a disaster for the euro area as the burden of high debt would increase. Therefore, the ECB will continue easing monetary policy significantly. But no matter what the ECB decides to do on 10 March, inflation is likely to hover around zero during the next few months before it picks up – if oil prices behave well.”

It’s not just analysts: Bank of France Governor Francois Villeroy de Galhau, an influential member of the ECB’s Governing Council, warned over the weekend that the central bank would have to act if the low energy prices appeared to have long-term effects.

As Reuters adds, the worrisome inflation print comes just days after the G20 meeting of the world’s top economies warned that leaders needed to looks beyond ultra-low interest rates and printing money to shake the global economy out of its torpor.

Still, the meeting failed to outline any bold steps and even called on central banks to maintain accommodating policies as weak Chinese growth weighs on all top economies and low commodity prices raise the specter of deflation.

This, until the surprising PBOC RRR cut, had pressured US equity futures into a lower open until a the traditional pre-market open ramp pushed futures into the green.

In any case, as we said last night when summarizing the post-G20 landscape, “the next big move in the market is now entirely in Mario Draghi’s hands” after quoting Citi’s Steven Englander:

The ECB is in focus. EZ is undershooting on growth and inflation, and ECB President Draghi has been impassioned on the need to provide more stimulus. If they lowball or grudgingly meet expectations, we could face another December 4 move because market participants will see it as the equivalent of a ‘last ease in the cycle announcement’, basically ECB throwing in the towel. If they move aggressively (and take measures beyond vanilla QE and 10bps on rates), they will catch market off guard and unwind the view that policymakers see themselves as powerless.

This has prompted speculation just what it is Draghi will announce in 10 days:

full article at source: http://www.zerohedge.com/news/2016-02-29/all-eyes-again-draghi-what-remains-ecbs-toolbox

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