EC ECB Preview: Worries Increase But Not Quite Ready To Act

The ECB meets Thursday, and it may be best conceived as a transition meeting. It will lay the rhetorical groundwork for two things: a likely downgrade to the staff's growth forecasts and moving toward a new round of long-term loans (targeted long-term refinance operations).  

Draghi's speech last week to the European Parliament anticipated the themes he can be expected to develop in his press conference on Thursday. The euro area economy is weaker than expected, and it can last longer than anticipated. The economy continues to require extensive support, just not net new asset purchases.  Nevertheless, with a firm labor market and increasing loan demand, Draghi is reluctant to fan fears of an area-wide contraction.  

The ECB President does not simply speak for himself, but he represents the institution.  This forces compromises that can torture the language.  There apparently is not a consensus to change the risk assessment, so Draghi has indicated the risk is balanced but growing to the downside. Ouch, it hurts the ears, but the meaning is ironically clear. Officials are becoming more concerned.  

Shortly before the ECB decision is announced, Markit will release their preliminary January PMI report. It covers German and France specifically and then the euro as a whole. In December, the composite (covering both manufacturing and non-manufacturing sectors) fell to 51.3 from 52.7 in November. This is a four-year low. The price sub-component fell (from 60.5 to 57.9) to a two-year low. Markit figures that the composite reading is consistent with slight growth in Q4 (0.1%) and the price component is at the upper end of what translates into broadly stable prices.  The Bloomberg survey found a median expectation for a flat manufacturing sector reading (51.4) and a small rise in services (51.5 vs. 51.2), which allows a little firmer composite (51.4 vs. 51.1).

The small rise is better than a small decline but is unlikely to change views or herald a rebound.  In fact, the ECB's forecast for this year of 1.7% is a bit on the high side.  The IMF's new forecasts put it at 1.6%. Markit sees it at 1.4%, and the median in the Bloomberg survey is 1.5%.  

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Read more by Marc on his site Marc to Market.

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