3 Numbers: Hawks and doves come out to play

Saxo Group:

Eurozone consumer confidence to be released today

  • The Federal Reserve’s future policy path seems fairly clear now
  • ECB clarifications should prove interesting for investors

By Juhani Huopainen

Today’s economic data calendar is light, and with investors’ attention firmly on the European Central Bank’s and Federal Reserve’s December meetings, the central banker speeches will be the main events.

The minutes of the previous meetings have further clarified that almost certainly the ECB will ease monetary policy further and the Fed will hike rates for the first time since June 2006. It seems that the December policy decisions are more or less already discounted by investors in financial asset prices, but the outlook after that appears murky.


Previous rises in Eurozone consumer optimism have been followed by huge shocks, but hopefully no repeat shock will follow the current peak. Photo: iStock

Market prices now seem to be sensitive to what it believes will happen after December. Recently the EURUSD and stocks rallied as investors began to expect the Fed to raise rates very slowly following the December hike. Meanwhile there is little certainty about ECB reactions now. So the ECB probably has greater potential to surprise.

ECB speeches (from 0800 GMT)

The European Banking Conference that begun last Monday in Frankfurt will conclude today. The featured speakers include:

  • ECB president Mario Draghi (0800 GMT)
  • ECB executive board member Peter Praet (0800 GMT)
  • ECB executive board member Benoit Couere chairs “Achieving a genuine EMU” (0815 GMT)
  • ECB executive board member Peter Praet on public and private debt overhang (1000 GMT)
  • Deutsche Bundesbank’s president Jens Weidmann on “How to address the euro area’s economic challenges?” (1015 GMT)
  • German Finance Minister Wolfgang Schaeuble (1015 GMT)
  • ECB Vice President Vitor Constancio on “Capital Markets Union” (1300 GMT)

The “casting” – or division of roles to individual players – is already pretty clear: the recently released minutes of the October meeting show ECB executive board member Peter Praet as very dovish (see ECB’s top economist signals need to act to maintain confidence). Praet warned that inaction would not reverse the slide in prices and the credibility of the central bank could be questioned. That could lead to households and markets to revise down their long-term expectations.

That to me is a clear signal that the ECB will have to attack low inflation with guns blazing at the December meeting – most probably by notably increasing monthly asset purchases and repeating the promise to extend the program if needed.

On the other side of the hawk-dove spectrum we have Bundesbank president Jens Weidmann who a week ago tried to explain away low inflation as resulting from low energy prices rather than weak domestic demand. He doesn’t see a high risk of deflation. He said that the ECB’s bond purchases blur the role of the central bank and should only be used to fight deflation.

Mario Draghi will take the middle road – by stating both the German view that bond purchases are, if not evil, at least questionable, but more is needed for the Eurozone to return to its inflation target, he can get the all-clear from the hawks.

I don’t know whether German policymakers are playing for their domestic audiences, scared of risk-sharing or if they actually believe what they are saying. But I am fairly certain that whatever the reason for the slow and reluctant pace of their actions, the outlook for the euro area is not great.

The ECB is already known as the slow kid on the block, but investors are still willing to forgive the ECB’s sins.

US central bankers speak

Federal Reserve Bank of St. Louis President James Bullard speaks on the economy and monetary policy (1400 GMT). Federal Reserve Bank of New York William Dudley participates in discussion on the economy with Hofstra University students (1615 GMT).

European Union November Consumer Confidence (1500 GMT): European consumer confidence is expected to have deteriorated slightly to -7.5 from the previous month’s -7.7. Consumer confidence has been falling since last March, but most of the falls have merely erased the undue build-up of optimism seen in late 2014.
EZ confidence short

Chart: Saxo Bank

It remains to be seen what effect the terrorism scare will have on confidence. The rest of the European Commission’s confidence indicators will be published next Friday. Markit will release the advance estimates of November’s purchasing manager indices next Monday, followed by the German Ifo sentiment on Tuesday.

I keep worrying about the high level of consumer optimism in the Eurozone. Previously when the confidence index has hit levels, that we have seen the economy hit soon afterwards by huge shocks – the 1992 crisis of the European Monetary System, the dotcom-bust in 2000 and the financial crisis in 2007.

Maybe this time consumers are right. But I’ve never been comfortable of thinking that “this time it’s different”. It usually isn’t.

EZ confidence long


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