Just one week after the eyes of the world were looking at Wyoming where the Federal Reserve had its annual meeting in Jackson Hole, the council of the European Central Bank came back from its summer recess, and even though we didn’t expect anything special to be announced, we were looking forward to read the fine print associated with the ECB’s decision.
As expected, nothing changed. Some people were expecting the ECB to either increase or extend its Quantitative Easing program, but we didn’t agree with this view. After all, the current program is still running until March next year, which is six months from now and it would have been a sign of weakness if the ECB would now already take a next step to ensure the cash will continue to be pumped in the economy of the Eurozone (as the M3 Money supply continues to increase at a steady pace). Additionally, we do have the impression the main central banks in the world are now basing their policy decisions on each other.
Source: tradingeconomics.com
Even though the Federal Reserve has been hinting at a rate hike, we don’t expect anything to happen before December, the month after the presidential elections. That’s also the main reason why we would have been very surprised if the ECB would have changed its program right now.
Don’t get us wrong, the European Central Bank will have to do ‘something’ but we would expect that ‘something’ to happen towards the end of the year, when it does become obvious the inflation targets won’t be met. The ECB has now downgraded its own expectations and now expects the HICP inflation rate to be just 1.2% in 2017, but if you’d look at the core inflation, you’ll see a different story.
Source: Danske Bank
As you can see on the previous image, a large part of the expected inflation will be caused by the energy prices which are obviously linked to the oil and gas price. If those prices don’t increase, the ECB won’t even remotely reach its inflation target, as the inflation rate based on the HICP inflation rate excluding the energy-related inflation will very likely be less than 1%. This means the ECB will have to figure something out to get the inflation rate going again, because it doesn’t look like the current 1T+ asset purchase program will do the trick.
Source: ECB
The ECB is anticipated to increase its purchasing rate to 85B EUR per month in the next few months after having seen a reduced purchase rate during the traditional summer slowdown as the Central Bank spent just 60B EUR in August with 6.7B EUR spent on the Corporate Sector Purchase Program. But what’s even more worrisome is the fact the ECB has reached the ceiling of the amounts it can purchase from the countries that are really in deep trouble.
Source: Danske Bank & ECB
Indeed, the monthly purchases of the problem-countries have fallen off a cliff, and the ECB has maxed out on its purchases of Portuguese assets. This could be problematic as Portugal remains one of the weakest countries in the Eurozone, with a very unstable financial system, as several banks have failed the most recent stress test.
This strengthens our thesis and we have no doubt that before the current round of quantitative easing will come to an end, the ECB will announce new measures. Or perhaps more of the same old measures.
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