USA:
• Solid February employment report proceeded next week’s FOMC
In February, the US economy generated 235.000 new jobs following an increase in non-farm payrolls of 238.000 in the first month of the year (revised upward from 227.000). The outcome beat expectations among analyst’s reporting their forecast to Bloomberg (200.000). The unemployment rate was 4.7 % (after 4.8 % in January). Average hourly earnings increased by 2.8 % in February (January: 2.6 % revised); another very solid outcome in the employment report. The strong numbers seem to nail down the anticipated hike in the fed funds rate next week, when the federal open market committee (FOMC) will take place (14th-15th March).
Eurozone:
• ECB: There exists an end to QE.
At the governing council (GC) meeting last Thursday, the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.0 %, 0.25 % and -0.4 % respectively. The GC continues to expect the key policy rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases (“Quantitative Easing”, “QE”).
The phrase aims at signalling information about the future course of monetary policy to financial market participants (“forward guidance”); a distinct and powerful instrument of monetary policy. Given that the sentence was unchanged to the previous statements, the ECB did not alter its forward guidance. It did not aim to tighten current monetary conditions, as Eurozone yields would have likely reacted for example to dropping “or lower levels” from the above forward-looking statement. On the other side, another sentence was dropped from the statement: “If warranted, to achieve its objective the GC will act by using all the instruments available within its mandate.” In addition, the targeted long-term refinancing operations (TLTRO) will expire. However, during the press conference, President Draghi reiterated that an exit from the QE programme was not discussed in the meeting of the GC.
Regarding the unconventional monetary policy measures, the GC confirmed that it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of 80 bn EUR until the end of this month and that, from April, the net asset purchases are intended to continue at a monthly pace of 60 bn EUR until December 2017, or beyond, if necessary, and in any case until the GC sees a sustained adjustment in the path of inflation consistent with its inflation goal.
In its updated staff macroeconomic projections that are prepared on a quarterly basis, the ECB forecasts an improving business cycle in the Euro Area compared to the previous projections in December. Real GDP growth is expected at 1.8 % in 2017, 1.7 % in 2018 and 1.6 % in 2019, while previously, the ECB projected growth of 1.7 %, 1.6 % and 1.6 % for 2017-19.
As we had expected (UCM Weekly as of 6th March), the ECB increased its inflation forecasts to 1.7 %, 1.6 % and 1.7 % for 2017-19, while in December the projections were 1.3 %, 1.5 % and 1.7 %. The outlook is based on the full implementation of all monetary policy measures, as outlined above. The statement says that “a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term.” Basically, the increase for 2017 inflation already resulted from higher than expected energy price base effects since last December. However, underlying inflation pressures continue to be subdued and the GC will continue to look through changes in headline inflation if judged to be transient and to have no implication for the medium-term outlook for price stability.
More interestingly, the ECB projections also included an upward rise in the core inflation rate (excluding volatile energy and food price indexes). The core inflation rate is forecast to increase to 1.1 %, 1.5 % and 1.8 % in 2017-19, while in December the forecasts were 1.1 %, 1.4 % and 1.7 % (Figure 2). The rise is fundamentally driven by improving conditions in the Euro Area labor markets: Compensation per employee is expected to rise by 1.8 %, 2.1 % and 2.4 % over the forecast horizon. The unemployment rate is anticipated to fall to 8.4 % in 2019. Hence, while the GC stated that it continues to look through transitory rises in headline inflation, eventually the staff projections included also an improving outlook for core price trends driven by fundamental economic developments. In other words, while the stance of ECB policy remains highly accommodative and the forward guidance implies a prolonged period of ultra-loose monetary policy, the macroeconomic projections included a small hint towards an end to that as inflation and in particular the core price trends – which have been stressed by President Draghi as policy-relevant – are expect to increase stronger over the forecast horizon. If the economy evolves along the lines that are projected, there exists an end to QE.
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
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