Market Commentary: ECB shows it does not react to short-term developments

Much has been said in recent weeks about the divergence and different stages of the economic cycle and subsequent recovery that exists between the US and the Eurozone. The thesis that US continues to be well ahead of its counterpart across the Atlantic is expected to be further accentuated as July economic numbers get published.

Eurozone July provisional CPI inflation came in at 0.4% y-o-y, short of what the market and, more importantly, the ECB had expected. ECB’s Mario Draghi will have to address at this week’s (Thursday 7 August) press conference whether this low print justifies additional ECB action.

It is clear that significant parts of the ECB’s comprehensive June package have yet to be implemented, and the ECB has shown that it does not react to short-term developments, but sets policy for the medium to long term. A point worth mentioning is the weaker euro, trading below 1.34, after June staff projections had projected a 1.38 level.

This should also set the tone of Draghi’s ECB speech later on this week. Draghi will also have to tackle the impact of the step up in sanctions on Russia as the EU has reportedly calculated that these could negatively impact the region’s GDP by 0.3% in 2014 and 0.4% in 2015, having the potential to put the eurozone back in recession if the situation escalates and there are eventual disruptions to Europe’s gas supply.

Meanwhile, in the US, the most recent FOMC statement has taken on a more hawkish tone in light of recent inflationary numbers, as the committee acknowledged that inflation had “moved somewhat closer to the Committee’s longer-run objective”, prompting it to remove its previous statement that an inflation rate persistently below 2% could pose risks to economic performance.

What this means is that if inflation remains elevated it will no longer be seen as an obstacle to rate hikes, as it could signify that the real economy is moving in the right direction. On the labour market, the FOMC judged conditions to have improved whilst second-quarter US GDP growth of 4% - signals that the first-half GDP picture now looks better than before.

This week, we await strong ISM prints, factory orders and the Michigan confidence survey, which data will give us a better glimpse on the US economy’s footing.

In Latam, price pressures are expected to be on the increase this week as inflation numbers in Mexico and Brazil take centre stage. While this implies a relatively un-worrying 4.0% figure in Mexico, a 6.6% print for Brazil could be disturbing for its economy as Brazil has been forced to hike rates this year.

Meanwhile, Brazil’s October presidential election looks set to be a tight one and too close to call for the time being, with the gap between those who would vote for incumbent President Dilma Rousseff (44%) in a second-round run-off has narrowed yet again, with many analysts expecting this one to go down to the wire.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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