Global Daily – ECB-Fed policy divergence resumes

by: Nick Kounis , Bill Diviney , Aline Schuiling

ECB View: Dovish chorus from officials continues – A number of Governing Council members added to the dovish commentary emanating from the ECB over recent weeks. The Governor of the central bank of Slovakia, Jozef Makuch, said that ‘development of underlying inflation so far isn’t showing convincing signs of a permanent growth trend’. Meanwhile, the Governor of the central bank of Finland, Erkki Liikanen, confirmed the view on inflation, saying that there were no ‘trustworthy’ signs yet of an upward trend in underlying inflation, which had remained lower than expected. In addition, he even raised the possibility that net asset purchases could be extended. Finally, the Austrian central bank governor, Ewald Nowotny, said that the ECB would make a decision on the end of QE in the summer. However, he seemed to suggest that an extension at a reduced rate of net asset purchases was a possibility. He asserted that ‘if we have a situation as we now foresee it’, we ‘then have the opportunity to significantly reduce this program’. It is notable that Mr Nowotny, usually a more hawkish member, talks of reduction rather than a wind down or end of the programme and it could be a slip of the tongue. In any case, the tone from the ECB has seen a dovish shift recently and confirms that the exit from super accommodative monetary policy will be very slow. The shift likely reflects the ongoing lack of underlying inflationary pressures as well as the ECB’s analysis that slack in the economy may continue to dampen inflation going forward.

We continue to think that the ECB will set out a clear roadmap for the end of its asset purchase programme in June/July. We expect a tapering period of 6 months (3 months EUR 20bn p/m and 3 months EUR 10bn p/m). We do not expect the first rate hike to follow until the second half of next year (10bp in September and another 10bp in December). We expect the ECB to maintain or even strengthen its forward guidance on interest rates when it announces a wind down of net asset purchases. (Nick Kounis)

Fed View: When doves become hawks – Atlanta Fed President Bostic (a voting member of the FOMC this year) is to take part in a conference Q&A at 17:00 CET, where any comments on the outlook are likely to continue to sound moderately hawkish. Only in January, Bostic was firmly in the dovish camp, warning that inflation expectations could become anchored below the Fed’s 2% target, and preferring a ‘slow’ removal of accommodation rather than the ‘gradual’ characterisation used by his more centrist colleagues. However, in a speech on Friday his remarks were surprisingly hawkish, and this sentiment was reiterated in a Wall Street Journal interview on Monday. According to his Friday speech, Bostic now believes the Fed is ‘at or near’ its inflation and employment goals, and he sees upside risks not only to growth but also to inflation. In his WSJ interview, while he did not see ‘imminent’ overheating, he pointed to fiscal policy as raising forecast uncertainty, and said that 2019 could be ‘where more of the action is.’ The most surprising outcome of last week’s FOMC meeting, in our view, was the move up not only in the rate hike projections of centrists on the Committee, but also those of the doves (see here). Bostic’s comments provide further evidence that there has been a bigger hawkish shift on the FOMC than the market reaction last week suggested. (Bill Diviney)

Euro Macro: Economic sentiment declines – The European Commission’s Economic Sentiment Indicator for the eurozone followed in the footsteps of the composite PMI that was published last week, and declined in March. The ESI fell to 112.6, down from 114.2 in February. Despite its decline the indicator remained well above its long-term average value of 100, signalling ongoing growth above the trend rate. Nevertheless, most eurozone survey indicators have declined in the first few months of this year, which might suggest that GDP growth softened compared to the of 0.6-0.7% qoq that was recorded in each quarter of last year. However, we do not think the economy has lost significant momentum and expect growth to continue at around the same pace as last year. Indeed, the main drivers of domestic demand such as the ongoing recovery of the labour and housing markets, solid profit growth, low interest rates and fiscal stimulus in a wide number of member states have remained in place. These factors should continue to support consumption and fixed investment growth in the coming quarters. Therefore, the decline in sentiment seems mainly related to uncertainty about the outlook for the global economy and global trade, which has also weighed on sentiment in financial markets. Our base case scenario for the global economy does not include a global trade war, but is based on the assumption of a negotiated settlement of the conflict between the US and China. Therefore, we have not lowered our growth forecasts for the eurozone based on the decline in economic sentiment. (Aline Schuiling)