EC Divergence: The Only Macro

The major central banks have met. The general message is that continued strong monetary support remains necessary, and the coming increase in price pressures is likely to be technical and transitory. The US fiscal stimulus, on the back of which the OECD revised its global growth forecast up 1.4 percentage points to 5.6%, has been approved. The ECB's latest targeted three-year loan operation (TLTRO) saw demand for 330.5 billion euros, the most since last June, at a rate as low as 100 bps.

The race between the vaccine and the virus and its mutations continues at a very uneven pace and this has economic consequences. The eurozone has lagged behind in the fiscal and monetary policy response compared to the US, even though it was hit harder by the virus. It is also lagging behind in vaccinating its population.

While US President Biden has suggested the potential to return to normalcy after early July, Europe may struggle to reach its 70% vaccination target by the end of Q3. The OECD's latest forecasts have the US economy growing 6.5% this year and 4% the next. The EU economy, on the other hand, is expected to expand by a little less than 4% in both years.

The preliminary March Purchasing Managers reports are the data highlight in the week ahead, which also sees February US personal income and consumption and UK's employment, inflation, and retail sales. The PMI will likely show the contrasting performance between the US and EU/EMU. We continue to suspect that high-frequency data remains considerably less important in the current context than the broader picture. Instead, it seems that the big macro themes continue to dominate. Divergence is the most important of these.

There is simply no other country with the capability and will to provide as much stimulus as the US. Between the $900 billion package at the end of 2020 and the just-approved $1.9 trillion effort, the US has committed almost 14% of GDP. Treasury Secretary Yellen admits to being somewhat less concerned about fiscal sustainability because debt-servicing costs remain low. Monetary policy is also stimulative. The Federal Reserve is committed to buying $120 billion of long-term assets a month. Its balance sheet is near 38% of GDP, practically double the 19.3% at the end of 2019. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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