Global Daily – The focus of the Lagarde ECB

by: Nick Kounis , Aline Schuiling , Joost Beaumont

ECB View: Persuading governments and monetary policy review on the agenda – The new President of the ECB, Christine Lagarde, gave a speech on Friday (see here). Her remarks added some flesh to previous speeches and testimonies she has given on what are likely to be some of her strategic focal points at the ECB.

The ECB President put the onus on governments to step up to the challenges that the eurozone economy is facing. She argued that the eurozone needed to have a ‘strong internal economy which can sustain demand when the global economy weakens’. Ms Lagarde said that monetary policy was playing its role and would ‘respond to future risks’ but she also called for governments to step up investment spending and to take measures to boost productivity. In particular she noted that ‘completing the digital single market, the capital markets union and the single market in services can provide the impetus Europe needs to launch new and innovative firms and to spread new technologies faster around the union.’

These calls are along similar themes set out by her predecessor Mario Draghi, but some commentators have been hopeful that Ms Lagarde can be more influential in persuading governments. She faces an uphill struggle here. For instance, based on plans of eurozone member states, fiscal stimulus next year is planned to be a negligible 0.2% GDP. The German government – one of the states with large room for fiscal manoeuvre – has said it does not intend to change course unless there is a ‘crisis’.

A second key target for the new President will be a strategic review of the ECB’s inflation goal and tools, which would begin in the ‘near future’. Although there are very sound economic reasons to conduct such a review, achieving unity in the Governing Council would be for sure also a desired outcome. The disagreement among members on how to interpret the ECB’s mandate and the use of its tool box has intensified over recent months. Getting all officials on the same page would help to strengthen the ECB’s credibility. The trouble is that although all officials seem to welcome such a review, many seem to be shaping up for different outcomes. For more dovish members, clarifying the symmetry of the inflation goal or even moving to a more ambitious goal (for instance, average inflation targeting) is where they would like to end up. More hawkish members seem to want to take a step back to how the inflation goal was defined in the past, where the ECB could be more comfortable about low inflation outcomes and would therefore not have as much need to resort to unconventional monetary policies (at least according to them). So the review will not be an easy task either. (Nick Kounis)

Euro Macro: Eurozone industrial sector still contracting, services sector cooling – Germany’s two main business sentiment indicators for November were published in recent days. They each indicated that Germany’s industrial sector is stabilising but remains in contraction territory. To begin with, the manufacturing PMI increased to 43.8 in November, up from 42.1 in October. In addition, the Ifo business climate in manufacturing declined only slightly further to 90.8 in November, down from 91.1 in October. Both the manufacturing PMI and the Ifo business climate in manufacturing remain well below their long-term average values and remain at levels consistent with ongoing contraction in Germany’s manufacturing sector. Still, they each have been hovering around their current levels since August, which suggests that the pace of contraction is stabilising. With regards to the eurozone as a whole, a similar picture was painted by the PMI report for November. Indeed, the indicator increased somewhat in November, but remained at a level consistent with continued contraction in industrial output.

Turning to the services sector, the services PMI for Germany, as well as the indicator for the overall eurozone, declined in November. The eurozone index fell to 51.5, down from 52.2 in October. What is more, the forward looking expectations component of the report also moved lower in November. In contrast to the manufacturing PMI, which has stabilised in recent months, the services PMI has been falling since August, which suggest that the weakness in industry that has started in early 2018, has spread to services. Consequently, we expect eurozone GDP growth to have been close to zero in the final quarter of the year. (Aline Schuiling)

Euro Fixed Income: QE purchase data point to reduced PSPP share – The weekly figures of the Eurosystem’s net asset purchases have started to paint a clearer picture about the relative size of the different programmes that make up the new round of QE. The key message remains that the share of the PSPP has been reduced, while the shares of the private sector programmes have risen. The central bank restarted QE at the start of the month, buying EUR 20bn of bonds on a net basis every month. In fact, last week’s data showed that the Eurosystem has already bought EUR 20bn during the first three weeks of the QE restart. This is in line with expectations that it will frontload net asset purchases, as it will take a break from 19 December to 31 December. If the current purchases are a good reflection, the share of the PSPP in total net purchases will be 62%, that of the CSPP 23%, while the CBPP3 will have a share of 12%, leaving 2% for the ABSPP. This marks a shift of focus towards the private sector programmes, as in 2018 the average share of the CSPP and the CBPP3 were 15% and 8%, respectively (and that of the PSPP 76%). (Joost Beaumont)