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What can we expect from the ECB meeting?
Rating:
Loading...France - Manufacturing PMI for July 50 vs. 51.6 Expected.
Germany - Manufacturing PMI for July 43.1 vs. 45.2 Expected.
Eurozone - Manufacturing PMI 46.4 vs 47.7 expected.
Today's data only confirms that Europe is heavily dependent on the situation in the rest of the world, and especially in countries like China. The economic slowdown in the world has a direct effect on the economy of Europe and the Eurozone. With the capture of the old continent under the "cross-fire" of the war, Q2 data confirmed a sustained economic slowdown. This, in turn, also implies a poor performance through Q3.
Economic recovery will remain in doubt as Chinese imports have not improved. Now, however, worries about the German economy that is going into recession are intensifying, which shows pressure on ECB to do so tomorrow to overcome future negative events. The pressing question, however, remains with how much and how the Central Bank has been prepared for measures to stimulate the economy. This should be clear tomorrow. The market does not doubt that these incentives will occur, but the ECB's presidents will most likely want more time to assess which tools will have the most effect to be implemented.
Maybe they will stop a change in interest rates on deposits? Undoubtedly, this would be the "one-off" tool. Rate cut is a near-real option, but the ECB does not want to hurt banks so much. There are already serious problems facing Spanish banks, and in countries like Germany, further cuts in interest rates with negative returns in negative territory will only create more difficulties for the region and its banks.
Reducing the Base Interest Rate? This is rather an option that will go hand in hand with a possible reduction in interest rates on deposits. But again: How long is the ECB ready to act like this tomorrow? Most likely, they will need more time to plan this move, so we will rather see tomorrow a change in attitudes toward rhetoric and intent. Dovish position.
Quantitative facilities are also an option. Is it? Whatever the ECB wants to not take QE, there are currently not much choice for action, and the fastest they can take is restarting the redemption program. The main problem here is that the bank is reaching its limit on purchases to certain countries, so it is questionable how effective this undertaking will be.
The worry here is also that tomorrow if QE is taken, it may be premature, with the other stimulus options being unexpected. Therefore, tomorrow we will rather have dovish rhetoric, and take real action in September. Given the next week's FED meeting, it will also give ECB more time to maneuver.
The problem of waiting is that the bank runs the risk of economic development (or economic shrinking) and markets remain disappointed that the bank has not acted tomorrow.
Trader Martin Nikolov Read more:
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