As the Fed debates whether to tighten, the ECB may be debating whether to ease....

Wednesday 2nd September 2015

As the Fed debates whether to tighten, the ECB may be debating whether to ease....

Ref : " Investors Betting on More ECB Stimulus" , The Wall Street Journal Online

We did mention yesterday that the agenda for the European Central Bank's meeting on Thursday is likely to include at least a discussion on whether to expand its Quantitative Easing programme, but in hindsight we probably should have made more of it. Judging from market chatter, a small but growing body of opinion has it that ECB boss Mario Draghi will act to further ease monetary policy to combat three major concerns:

The slowdown in China's economy

A strengthening Euro

Low Eurozone inflation

China's problems that have caused such turmoil in global markets have adversely affected both the prospects and share prices of major Eurozone companies that are reliant on Chinese demand, particularly at the luxury end. The recent strength of the Euro, caused in part by capital inflows after the devaluation of the Chinese yuan, has damaged the competitiveness of Eurozone companies trying to sell their products abroad, and August's inflation data show virtually no rise in prices year-on-year.... a scenario unlikely to change too much given the rout in the price of oil and other commodities.

It doesn't seem too long ago that some were suggesting that the ECB might even curtail its QE programme after the release of encouraging growth numbers. That growth has proven to be geographically variable within the Eurozone (France in particular is struggling) and its sustainability  has been threatened by global developments.

So, there is a case to be made for further easing but to act at this stage would seem to be premature and the majority of analysts expect no action. It would come as no surprise however to see the "jaw-boning" start .... in other words, the process whereby the very mention of the possibility of easing has the effect of massaging the markets in the desired direction. That is to say, lower Euro, higher stocks and bonds.

Watch out for the press conference after tomorrow's meeting....