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ECB's Draghi Cheers QE Success

Posted by Joseph Trevisani on Apr 15, 2015 1:47:00 PM

Mario Draghi, European Central Bank president and chief proponent of its quantitative easing policy claimed the program is already having a positive effect and that concerns about its implementation are overstated. 

“There’s clear evidence that the monetary policy measures we’ve put in place are effective,” Mr. Draghi said at his press conference in Frankfurt on Wednesday after bank governors left the main-refinance rate unchanged at 0.05 percent.  “We expect the economic recovery to broaden and strengthen gradually.”

There is preliminary evidence that deflationary pressures, cited by Mr. Draghi as a major worry, are easing in the 19 nation currency union.

Consumer prices fell just 0.1 percent in March from the prior year a substantial improvement over January's 0.6 percent decline and Februarys 0.3 percent fall. But it is still the fourth negative month in a row. Prices slipped 0.2 percent in December.

The ECB tracks overall consumer inflation, including energy and food costs. It is as yet unclear how much of the rise in prices from January to March is due to the bank’s bond and securities purchases injecting liquidity into the European financial system or the 14 percent rise inthe price of crude oil.

Brent crude averaged $49.76 in Janaury ans $56.94 in March. Some of the move from -0.6 percent in Janaury to -0.1 percent in March reflects this gain. 

Producer prices have also moved up. The produce price index for February was 0.5 percent, a large jump from the 1.1 percent decline in January.

Analysts have speculated that the ECB might not find enough bonds to buy given that it has limited purchases to bonds with t higher coupon rate than its own -0.2 percent deposit rate.  

A wide range of sovereign debt of eight members of the European Monetary Union offers negative interest rates. German sovereign debt is negative out to eight years. The 10-year yield fell to another record this week at 0.11 percent as the ECB's 1.1 trillion euro ($1.2 trillion) quantitative easing program forced up credit prices and lowered rates across the region. 

European economic statistics have yet to respond forcefully to the added stimulus but most are improving, if modestly

Retail sales fell 0.2 percent in February as expected, though annual sales moved up to -3.0 percent from -3.2 percent. Industrial production jumped 1.1 percent in February, up from -0.3 percent a month earlier and the yearly rate moved to 1.6 percent from 0.4 percent. 

Sentiment numbers have also improved. Markit's manufacturing PMI climbed to 52.2 in March  from 51.0 in February for the best score since last May. Likewise the services PMI reached 54.2 its best since last July.  Economic expectations as measured by the ZEW Institute in Germany rose to 62.4 in March  from 52.7 in February, 45.1 in January and  4.1 last October. 

Industrial confidence has climbed from a low of -5.0 in December to -2.9 in March and consumer confidence has rebounded from -11.4  last September to -3.7 in March. 

Mr Draghi has said that the quantitative easing program will continue until September 2016 or until a "sustained adjustment" in inflation toward the banks 2.0 percent target takes place.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

emu cpi april 15

 retail sales april 15

 zew exp april 15

market mfg april 15


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