Tags: euro | draghi | survey | economy

US, Europe Headed on Different Roads of Growth

US, Europe Headed on Different Roads of Growth

(Dollar Photo Club)

By    |   Friday, 21 October 2016 07:37 AM


In Europe, the Governing Council of the ECB decided to keep the key ECB interest rates unchanged on the marginal lending facility and the deposit facility at 0.00 percent, 0.25 percent and -0.40 percent respectively, and stated it expects them to remain at present or lower levels for an extended period of time, and well past the horizon, which is end of March 2017, of its net monthly asset purchases of 80 billion euros.
 

In simple words, nothing happened and during the press conference of Mario Draghi it became clear that the ECB wants to keep all options open and therefore refrained from discussing anything that could have caused a market impact before December 8, the date of the next monetary policy meeting of the Governing Council of the ECB.
 

Nevertheless, we got a small hint of how the Governing Council is thinking at present and that is that an abrupt ending of the bond purchases is not in the cards at the end of March 2017 and that fact alone, we could say, introduces the topic of tapering, which is by itself hardly shocking.

It all comes down to the fact that the ECB has the intention to continue its bond buying program beyond the of March 2017 as it stated: “Regarding non-standard monetary policy measures, we confirm that the monthly asset purchases of 80 billion euros are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
 

Now, in its communique itself it also states: “In the September 2016 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 0.2 percent in 2016, 1.2 percent in 2017 and 1.6 percent in 2018.”
Investors could do well to keep in mind that the ECB aims at inflation rates of below, but close to, 2% over the medium term."
 

In context of all this, the ECB Survey of Professional Forecasters (SPF) for the fourth quarter shows that average inflation expectations of 0.2 percent, 1.2 percent and 1.4 percent for 2016, 2017 and 2018 with respectively 2016 and 2918 slightly revised down while average longer-term inflation expectations (for 2021) remains at 1.8 percent.
 

When we compare these forecasts with the Philly Fed SPF (next release is November 14) we see that U.S. inflation for Q4 in 2016, 2017 and 2018 is expected at 1.6 percent, 2.3 percent and 2.3 percent respectively.
 

Please keep in mind that of all sentiment surveys, these SPFs are considered as the more reliable ones because of the the way in which professional forecasters forecast, which is, at least in theory, stripped of emotion and therefore give a better idea of economic reality than business and consumer confidence surveys tend to do.
 

So, taking only these SPF data into account, the performances of the Euro area and the U.S. are set to diverge further away one from another, which should result in a stronger dollar vs. the euro over the next couple of years.  

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
Of all sentiment surveys, SPFs are considered as the more reliable ones because of the the way in which professional forecasters forecast, which is stripped of emotion and give a better idea of economic reality than business and consumer confidence surveys tend to do.
euro, draghi, survey, economy
538
2016-37-21
Friday, 21 October 2016 07:37 AM
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