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The European Central Bank meet today to decide on rates and monetary, just one-day after the Bank of Canada became the first major central bank to taper its QE program, and primed the market for a rate increase as the Canadian economy looks to be firing on all cylinders.
Traders looking for such hawkish measures during today’s ECB meeting will be left sorely disappointed. The eurozone economy currently can only wish that it had some of the dazzling economic activity that Canada enjoys, largely due to the nation being rich in commodities, and a major trading partner of the United States.
Instead, the ECB are expecting to keep the foot on the gas today, and sound somewhat downbeat towards the eurozone economy, at a time when uncertainty still exists, despite some improving data points.
Last month the ECB increased the Pandemic Emergency Purchase Program, also known as PEPP. This was done to stop the eurozone economy slumping further, amidst a wave of fresh COVID-19 infection across the continent.
M1 money supply in the eurozone, which includes those monies that are very liquid such as cash, checkable deposits, money market funds, and traveler’s checks hit a new high after the PEPP program. M2 money, which supply is less liquid in nature, and M3, also skyrocketed.
With so much money sloshing in the system it is hoped that the EU economy will keep trucking along until such time as the ECB can taper down QE as the continent comes out of lockdown.
The big risk for the ECB is a third COVID-19 lockdown, which risks further market distortions. One only must look at the volatility in the stock market, and indeed the crypto market to see where the money is being deployed, and re-deployed.
Inflation is still benign in Europe according to most CPI metrics. However, it has be recognised that the price of most goods and services has increased across the EU. It is noteworthy that inflation is on rise the most where it hurts consumers, namely food and gas.
The ECB has a mandated target of two percent inflation, which generally speaking the central bank has managed well. But as everyday costs rise, you do have to question the inflation reading now, and just how accurate it really it.
The bright spot for Europe right is manufacturing activity. The last official Manufacturing PMI from the eurozone was revised higher to 62.5 in March 2021, from a preliminary estimate of 62.4.
This was well above February’s 57.9, and suggested operating conditions improved to the greatest degree in nearly 24 years of survey history. Manufacturing output and new orders increased at record rates, helped by the fastest increase in export orders since data began. This is a bright spot that the ECB could touch upon today.
Friday’s Preliminary PMI numbers from Europe are going to be a big deal. So much so, that I suspect that the ECB meeting will be a side-show as the PMI numbers will be even more important.
Those traders who focus on the euro and the European indices may be in for lively day if the April numbers outperform and start to post record PMI readings above 60.
Traders looking for the ECB to provide a significant market move may be left disappointed as the central bank stick to script. Overall, Friday’s PMI reading look far more significant in terms of generating market volatility.
