Is the ECB regretting the end of QE?
After the ECB completed its asset buying program in December, the economy barely showed signs of self-sustained growth, with trade wars seemingly choking growth substantially.
Inflation expectations, measured through forward swaps, collapsed, while Thursday CPI data (1.3% vs. 1.5% of the forecast) fueled concerns that things are spiraling quickly out of the ECB’s control:
It’s unclear to some, as to why the ECB decided to taper off purchases, at a time when core gauges of economic health were dire:
Inflation on industrial goods collapsed in the Q4 2018, not taking into account fuel’s downtrend that has been running since the end of 2015 (green line).
In order to search for positive points recovery, one could investigate German production figures, the powerhouse of EU. However, we’re still confronted with an unpleasant surprise:
Production of passenger cars in Germany is falling at an alarming rate, with figures similar to those seen in the 2008 crisis. At the same time, the barrier to sales was not only a slowdown in demand in Asia, but also a decline in domestic sales.
Pessimism grew in corporate expectations, and they have steadily declined until today:
It remains a mystery to some, as to why the ECB decided to stop supporting the economy. Although there is an assumption: a structural imbalance in terms of growth prospects for the economies of the periphery and the core. “Narrowing” the growth gap was done through credit easing. Therefore, if weak economies lose nothing, then stronger economies like Germany prefer to have some monetary tools reserved to impact the output in the event of a recession.
We always welcome other opinions, so why not share! Do you think that ECB made a mistake by ending their QE programme?
In other news, Asian stocks rose on Friday. The main surge of optimism came from the Chinese stock market, thanks to reports of a breakthrough in the US-China trade negotiations. The global bond rally seems to have run out of steam before the end of the week, marked by a strong flight from risk.
The Shanghai Composite Index jumped 3.2%, after receiving an essential dose of confidence. Growth could potentially extend next week, after White House officials stated that China had taken the first step in resolving key bargaining differences, namely, determining the conditions for a fair playing field in getting long-term technological leadership.
On Friday, Mnuchin said that a working dinner with Chinese colleagues turned out to be very “productive”, increasing the hope that further statements on the progress of the negotiations would balance the news background, already badly damaged by the statements from the ECB and the Fed.
The robust position of US indices primarily speaks of the favorable reaction of investors to the signal of support from the Fed. The stock market does not share the concerns of the bond market, which is reflected in the simultaneous growth of both, generating a conflicting signal in assessing the prospects for economic recovery. Since the beginning of the year, SPX has soared by 12.3%, posting the best realized return since 2009.
The yield on 10-year Treasury bonds rose to 2.402% on Friday, after dropping to a 15-month low of 2.352% on Thursday as the Fed began to cut plans for policy tightening. The negative spread between the yield on 10-year and 3-month bonds, observed at the end of last week, demonstrates the expectations that, even in a three-month investment horizon, even deeper Fed concessions may occur.
Sadly for the Fed, the fourth-quarter US GDP was revised from 2.6% to 2.2%, consumer spending to 2.5%, and the price level of goods (excluding imports) rose by 1.7%. This adds to concerns about inflation, which is losing momentum because of a deterioration in foreign trade (i.e. a component of imports in inflation).
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.