The Basis Behind The Forming ECB ‘Pause’

These things are all related, not that they are in any way connected by conventional thoughts on the subject of the global economy. Two European officials are now on record hinting at an ECB “pause”. There is one already underway in the US, Federal Reserve officials past and present debating how long it might last while markets price probabilities for the first cut.

The situation in Europe is a little different in that pausing means failing to start. In that way, it would be more like the Fed’s first pause in 2015 and 2016. One of the two ECB members is likely to replace Mario Draghi when his single, non-renewable eight-year term expires in October.

Speaking to BloombergTV:

Two of the top contenders to become the next European Central Bank president said they don’t know if the institution will be able to raise interest rates this year…Benoit Coeure and Francois Villeroy de Galhau both said in Bloomberg TV interviews in Davos that the ECB is still judging the extent of the euro area’s economic slowdown and any increase in official rates will depend on that prognosis.

Judging by Germany’s bond market, they’re not raising anything anytime soon. Economic stats out of Germany concur, coming in at recessionary rates or even minus signs already. Mario Draghi’s position has been that German weakness is a product of transitory and specific factors; emissions regulations and local weather.

With each successive monthly data point, however, that position is becoming untenable. Thus, Draghi retreated somewhat yesterday, admitting there is some stickiness to the unexpected softness.

Incoming data have continued to be weaker than expected as a result of a slowdown in external demand compounded by some country and sector-specific factors. While the impact of some of these factors is expected to fade, the near-term growth momentum is likely to be weaker than previously anticipated.

The German ZEW sentiment measure was one of the first to foretell of the economic downturn. In January 2019, at -15 it shows that a broad cross-section of German economic participants operating at close quarters with the global economy remain very pessimistic – this hasn’t changed, refuting Draghi.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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