ECB On Hold, All Eyes On The Outlook As ‘Goldilocks’ Conditions Affirmed By PMIs

Ok, so here comes the ECB.

As a reminder, they “can afford to be boring”, to quote BofAML. The heavy lifting in terms of forward guidance and the taper announcement was done in October, so they’ll sit on their hands in that regard. The forecasts will be closely watched however. Do note the data we got this morning:

Eurozone Dec. Flash Manufacturing PMI 60.6; Est. 59.7
Eurozone Dec. Flash Composite PMI 58; Est. 57.2
Eurozone Dec. Flash Services PMI 56.5; Est. 56
Germany Dec. Flash Manufacturing PMI 63.3; Est 62
Germany Dec. Flash Composite PMI 58.7; Est 57.2
Germany Dec. Flash Services PMI 55.8; Est 54.6

That German manufacturing print is a record. So that would appear to underscore the case for a sustainable upturn in the bloc’s economy although as Bloomberg cautions, “today’s French CPI data and yesterday’s report on barely-rising German wages affirm the low-inflation picture for now.” Call it “Goldilocks” – as per usual.

The euro is sitting near its 100-DMA with all eyes on the ECB’s projections which will be parsed for clues as to how policy will evolve in 2018. Consensus is for asset purchases to be tapered completely by the end of next year with a hike in 2019.

Here’s are the bullets:

ECB LEAVES MARGINAL LENDING FACILITY UNCHANGED AT 0.25%
ECB LEAVES DEPOSIT FACILITY RATE UNCHANGED AT -0.4%
ECB LEAVES MAIN REFINANCING RATE UNCHANGED AT 0%

And the full language:

At today’s meeting the Governing Council of 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 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council confirms that from January 2018 it intends to continue to make net asset purchases under the asset purchase programme (APP), at a monthly pace of €30 billion, until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the APP in terms of size and/or duration. The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.

Below, find out what you need to be watching in the hours ahead…

From BofAML:

A number of Governing Council members have hinted at an upward revision in the ECB forecasts in December, drawing on the strong momentum in the data, e.g. with the further improvement in the composite PMI in November. That may hold for GDP, but the inflation scenario will be complex. While it is easy for the central bank to argue that the acceleration in the output gap resorption would warrant an upward revision in core inflation, the staff will also have to take into account yet another deterioration in the base. Last week’s estimate of core inflation for November at 0.9% yoy cannot be ignored. Fortunately for the ECB, its forecasting horizon will be extended to 2020 in the December release. We think that the staff will have inflation in line with the mandate by end 2020, accelerating from 2019’s still borderline 1.7% yoy.

And Goldman:

Updated staff macro-economic projections. We expect the updated staff forecasts to show somewhat of an increase in the 2018 GDP growth forecast, owing to the small upside surprise to GDP growth in Q3 and a small lift to sequential growth rates in Q4/Q1 owing to recent momentum. Reflecting recent increases in oil prices, we expect the headline HICP inflation forecast for 2018 to rise 0.1pp to +1.3% (with core HICP inflation unchanged at +1.3%). A forecast for the year 2020 will be included in this projection for the first time. We expect the ECB to forecast headline HICP inflation at +1.7% (with Q4 2020 inflation at +1.8%yoy). The rise in inflation 2019 and 2020 projected by the ECB staff would reflect some underlying increase in wages owing to reduced economic slack and lower unemployment. These inflation projections would signal a continued need for accommodative monetary policy, but also some progress in raising inflation.