Global Daily – When hawks become doves

by: Nick Kounis , Bill Diviney

ECB View: Hawks do not sound so hawkish anymore – Three ECB officials that have been historically at the hawkish end of the Governing Council spectrum spoke today. Their tone has clearly shifted signalling the extent of the change in thinking at the ECB given the slowdown in economic growth. The President of the Dutch central bank Klaas Knot displayed the most notable swing. In an interview in the Financial Times, Mr Knot said that ‘at this moment a wait-and-see attitude is probably the optimal attitude…we are now going through a couple of quarters where growth has fallen below potential, which means the build-up of inflationary pressures will also incur some slight delays.’ He added that ‘we will have to be patient and also, in my view, modest with respect to the precise moment at which we can expect inflation to converge toward our medium-term objective’. While not in favour of further steps to ease policy, saying ‘we are not there yet’ he did emphasise that in the past the central bank has been ‘ innovative’ when needed. Meanwhile, the Bundesbank President Jens Weidmann said that the weakness in the economy had been a ‘ bit more protracted’ than initially thought, while sticking to the central bank’s medium-term inflation outlook. Finally, Ewald Nowotny, the Governor of the central bank of Austria, signalled that the ECB would re-consider its outlook for policy rates ‘in the summer’. The ECB’s forward guidance states that interest rates are expected ‘to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’. We think the forward guidance could be amended in June, to rule out rate hikes this year.

Overall, it is interesting to note that all three of these Governing Council members were advocating policy rate hikes as soon as possible not long ago. The slowdown in economic growth seems to have changed their thinking on this and the shift of the hawks is important in signalling that policy rates are unlikely to go up this year. (Nick Kounis)

US Macro: Big decline in small business confidence – The NFIB Small Business Optimism index fell sharply in January from 104.4 to 101.2, the weakest reading since November 2016, when President Trump was elected. While the backward-looking components of the index remained very strong, including levels of job creation, compensation, and investment, falls in forward-looking components relating to hiring plans (-5 points), and expectations of the economy improving (-10 points) suggest growth momentum is likely to continue slowing in 2019. The accompanying commentary from the NFIB points to the government shutdown, financial market volatility, and growth concerns in Europe and China as clouding the outlook for small businesses. The weakness is consistent with much of the soft data coming out of the US of late, including the ISM manufacturing PMI (notwithstanding a recent rebound) and consumer confidence – where weakness has been concentrated in the forward-looking components. It is also consistent with our view that the economy is on a cooling trajectory, and that the Fed is likely done with rate hikes. While a stabilisation in confidence measures is likely as some of this uncertainty lifts in the coming months, we believe the peak of the business cycle is behind us. (Bill Diviney)