ECB President Mario Draghi and his fellow members on the European Central Bank’s Governing Council have been doing everything right to commit a policy mistake, similarly to their predecessors under Jean-Claude Trichet. Mr. Trichet pulled the trigger too quickly by lifting the policy rates in 2011 contributing to the W-shaped recession in the Euro Area. Mr. Draghi is on the same trajectory, as macroeconomic developments do not warrant policy normalisation anytime soon.
Inflationary processes in the Eurozone remain quite unsettling, as both annual headline and core inflation measures decelerated compared to the previous month. In July, both headline and core CPI inflation decelerated 0.1ppt to 2% YoY and 1% YoY, respectively. The weakness in both measures was induced by sluggish services price inflation, which moderated to 1.3% YoY. Even though the headline measure has been hovering at the ECB’s inflation target, the core rate that filters out volatile prices driven mostly by external forces (such as energy prices), remains extremely depressed. In addition, annual growth of the M3 monetary aggregate eased to 4% YoY in July vs. 4.5% YoY in May. The speed of M3 growth is more-or-less in line with the pace by which the European Central Bank has been scaling back its monthly asset purchase. The pace in July implies that credit growth is likely to have a neutral impact on GDP growth and is very unlikely to contribute to it anytime soon.
As the saying goes: ‘When it looks like a duck, swims like a duck and quacks like a duck, then it is probably a duck.’ In this case, the Euro Area’s economy perfectly exhibits the symptoms that call for further aid by the monetary authority, especially since no structural reforms are in sight in the member states that crucially need them.
Developed markets face a rather exciting week, as the economic diary is packed. Most importantly, the US releases the usual monthly jobs report, which almost always moves markets. This time, nominal wage growth is in the limelight, since wage inflation are the last piece of the puzzle in the US that is needed for a steeper rate hike trajectory. Meanwhile in the Euro Area, some of the relevant ECB policymakers will give speeches and might provide some insights on the Governing Council’s intentions. On Friday, final GDP figures will be released, which finally reveals the detailed breakdown of the Euro Area’s growth in Q2.
Asian countries kick off the week by releasing August manufacturing PMI figures on Monday and continue with the publication of inflation data. In the second half of the week, India publishes its current account balance that could have an impact on the rupee’s exchange rate.
Latin America will be dominated by Brazilian political news flow, Argentine crisis management and NAFTA negotiations between Mexico, the US and Canada. As a result, the economic diary will be secondary this week.
African markets will be mostly influenced by developments in South Africa, where the political debate on the reform related to land expropriation is in the limelight. Furthermore, Q2 GDP release on Tuesday will shed light on the recovery of the South African economy.DOWNLOAD THE FULL ARTICLE View All Global Market Updates
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