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The All-New Symmetric ECB
This ECB meeting will be different. For a start, the opening statement is going to be shorter and more understandable. Lagarde told us this much when she launched the results of the ECB Strategy Review on 8th July. But is this just another cosmetic tweak or will there be substantial changes?
There certainly should be. The ECB has now changed their mandate for the first time in twenty-three years. Having failed abysmally to achieve their rather tortuous previous target of “close to, but below, 2%”, they’re now gunning for simple symmetry around 2%. As Lagarde explained at the Strategy Review, ‘Symmetry means that the Governing Council considers negative and positive deviations of inflation from the target to be equally undesirable’.
In practice, this unleashes the ECB doves. Previously they had to accept 2% as some kind of ceiling, which many of them feared was trapping the eurozone in a low growth, low inflation twilight zone. Since 2013, average annual inflation in the euro area has been just 0.9%. Now the doves can argue that expectations need to be reset in order to get inflation up to its target.
Why did the hawks agree to this?
They’ve certainly not been backward in coming forward over the years. But just as the Germanic fear of printing money was overcome by Mario Draghi, they have once again been forced to concede in this battle so that they don’t lose the war. There was a risk that the Strategy Review could have resulted in a Federal Reserve style “flexible average inflation targeting” regime, which would have tied the hands of the hawks by forcing them to push the stimulus pedal to the metal with average inflation so low for so long. Instead, they’ve managed to retain some power to interpret this new target in their preferred direction. Lagarde outright rejected the question of whether they were copying the Fed, replying ‘the answer is no, quite squarely’.
So now we have a target that seems to please both the doves and the hawks: the classic ECB fudge. Lagarde was at pains to point out that the new mandate was achieved with unanimous consent. Despite this bonhomie, Lagarde also warned that this week’s meeting would not “have unanimous consent”.
The most prominent perma-hawk, Germany’s Jens Weidmann, is certainly gunning for the end of one of the ECB’s alphabet soup of quantitative easing programmes. The PEPP was launched in March last year in direct response to the pandemic. After all the “E” of its name refers to “emergency” – and Weidmann now thinks we are past that stage. As he noted on 27th June: ‘advances on the vaccination front mean that the economy in the euro area… is now probably making its way out of the crisis… The incidence of the disease declines only gradually… All the more reason, then, to talk about the conditions under which the emergency situation can be considered over from the perspective of monetary policy‘.
Meanwhile the increasingly vocal dove Fabio Panetta of Italy (and old friend of Mario Draghi) has warned that tightening too soon would be disastrous: ‘If we are seen as determined to achieve 2% without undue delay and have a clear plan to do so by enabling monetary-fiscal interactions, rising inflation expectations will make our task easier. But if we are seen to be lacking determination, expectations will be less responsive and the “bang for our buck” will be considerably lower: we will end up spending more, not less, and we may not exit the liquidity trap.’
How, then, can Lagarde hope to reconcile the two?
By ending the PEPP and resurrecting the old APP – that’s the original Asset Purchase Programme launched under Draghi in mid-2014 when he was in full Whatever It Takes flight. But the APP will have to change. The amount of purchases might have to drop (to please the hawks) but continue for a longer period of time (to please the doves) – and to be flexible enough to be increased/decreased at any time (to please everyone).
What does this mean in practice?
Forget interest rates. QE is now the only game in town. It’s not going anywhere. But it is going to be recalibrated. This week’s meeting gives Lagarde the chance to set up this new framework so that markets can get used to it. We are in a new normal now. As Panetta recently concluded ‘we should recognise that what was seen as unconventional in the past is now conventional‘. Step forward the APP.
Week Ahead: ECB to tilt after strategic shift?
The ECB clarifies its policy position following June’s strategic shift this week. Data is dominated by UK monthly retail sales following a bumper second quarter, and a flurry of PMI reports. Meanwhile, Q2 earnings season heats up on Wall Street.
Let’s start with the major central bank announcement of the week. This time, it’s the turn of the European Central Bank. Markets will be watching the ECB’s next moves with additional scrutiny as it committed to a strategic refresh earlier last month.
We’ve seen inflation rates rise in the UK and US recently. While Eurozone inflation dipped away from a two-year high a couple of weeks ago, inflation and its effects have been brought to the fore of EU monetary policymakers’ thinking.
Following an 18-month strategic review, the EU has shifted its inflation target to 2%. According to observers, that would give the bloc enough wiggle room to a) accept temporary inflation rates above that and b) keep interest rates near or at historic lows.
Could this feed into a change in pandemic monetary policy? It’s possible, but the fact there is space for ECB policymakers to keep rates low suggests there’ll be no major change from the bloc’s current monetary trajectory.
At June’s meeting, the European Central Bank reiterated its commitment to €1.85 trillion in asset purchases under its PEPP mechanism. This was said to remain in place until March 2022.
Turning to data, one of the week’s key releases is UK retail sales for June and the month-to-month comparisons.
We can gauge June’s figures by looking at the recently-released Q2 2021 retail numbers reported by the British Retail Consortium alongside KPMG.
According to BRC, retail sales jumped 10.4% between April-June when weighted against the same period in 2019. This was the fastest quarterly growth reported since records began back in 1995.
The report also comes with an initial British retail health check for June too. KPMG reports that, against 2019’s levels, retail sales in June shot up 13.1%.
For context, BRC and KMPG are weighing retail sales against 2019’s numbers, as 2020’s numbers have been distorted by the Covid-19 pandemic.
A combination of lockdown easing, warmer summer temperatures, and Euro 2020 contributed to the rise in retail spending. Additionally, many UK holidaymakers have had no choice but to stay at home, thus keeping money that would be spent overseas in the local economy.
All of this is down to pent up demand being unleashed as lockdown restrictions lift. From Monday, nearly all of the major restrictions on British life are being removed, so the battle for wallets is now on.
What will be interesting to see is any change in habits from retail spending to experiences. This was the trend in the US for the past couple of months, so UK may shoppers may also move towards doing things rather than buying things.
We also have a wealth of PMI reports coming in from the US, UK, and the EU on Friday.
For the UK, both services and manufacturing IHS Markit PMIs showed the UK is still very much on a growth footing.
Starting with manufacturing, June’s reading came in at 63.9, a touch lower than May’s all-time high of 65.6, but still one of the highest rates in the survey’s 30-year history. However, industry insiders warned supply chain snarls and high input costs meeting surging demand could cause a slowdown in factory output going forward.
June’s services PMI reading was in line with UK manufacturing: a slight dip away from May’s high, but still showing strong growth. The actual reading came in at 62.4. However, rising operational expenses and staff shortages could impact growth in the short term, as could rising inflation. We’ll get a clearer picture with July’s reading.
The EU will be hoping to keep the momentum rolling into July too. June’s readings were some of the most positive for years. June’s composite flash index was 59.2 – an increase over the 57.1 registered in May. Services bounced from 55.2 to 58.0, suggesting pent up demand is driving the hospitality and services sector forward.
The US, while thriving, could have reached its peak, according to PMI releases. Its composite score for June was 63.7 – the second-fastest rate of expansion on record.
Chris Williamson, chief business economist at IHS Markit, said: “June saw another month of impressive output growth across the manufacturing and services sectors of the US economy, rounding off the strongest quarterly expansion since data were first available in 2009.”
“The rate of growth cooled compared to May’s record high, however, adding to signs that the economy’s recovery bounce peaked in the second quarter.”
Inflation will no doubt play a big role in July’s PMI calculations. Core and non-core prices are up in the economies mentioned above, but Friday’s release will give us a better understanding of its impact on US economic activity.
We also transition into the second week of US Q2 earning season. A mixture of tech and FMCG firms are reporting this week, including the likes of Netflix, Twitter, Intel, Johnson & Johnson, and Coca-Cola.
Oilfield services and engineering firm Schlumberger may be one to watch. Oil prices have gone from strength to strength this the tail end of last year. Has this fed into increased activity for multinationals like Schlumberger and consequently better financial results?
You can find a run down of the large caps reporting on Wall Street this week below, but you can also see our full US earnings calendar here.
Major economic data
|Tue 20-Jul||2.30am||AUD||Monetary Policy Meeting Minutes|
|Wed 21-Jul||2.30am||AUD||Retail Sales m/m|
|3.30pm||OIL||US Crude Oil Inventories|
|Thu 22-Jul||12.45pm||EUR||Monetary Policy Statement|
|12.45pm||EUR||Main Refinancing Rate|
|1.30pm||EUR||ECB Press Conference|
|3.30pm||GAS||US Natural Gas Inventories|
|Fri 23-Jul||7.00am||GBP||Retail Sales m/m|
|8.15am||EUR||French Flash Manufacturing PMI|
|8.15am||EUR||French Flash Services PMI|
|8.30am||EUR||German Flash Manufacturing PMI|
|8.30am||EUR||German Flash Services PMI|
|9.00am||EUR||Flash Manufacturing PMI|
|9.00am||EUR||Flash Services PMI|
|9.30am||GBP||Flash Manufacturing PMI|
|9.30am||GBP||Flash Services PMI|
|1.30pm||CAD||Core Retail Sales m/m|
|1.30pm||CAD||Retail Sales m/m|
|2.45pm||USD||Flash Manufacturing PMI|
|2.45pm||USD||Flash Services PMI|
Key earnings data
|Mon 19-Jul||Tue 20-Jul||Wed 21-Jul||Thu 22-Jul||Fri 23-Jul|
|Philip Morris International||Coca-Cola||AT&T||American Express|
|Netflix||Johnson & Johnson||Newmont Goldcorp||Schlumberger|
|Verizon Communications||Intel Corp|