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The ECB Is Super Proud Of Themselves In Annual Report – There’s Just One Problem…

" surprises are now the most negative since the peripheral crisis."

Here are some fun excerpts from Mario Draghi’s introduction to the ECB’s annual report, which I’m absolutely sure you were anticipating with the same enthusiasm you’re undoubtedly harboring for the new Avengers movie:

In 2017, the economic recovery in the euro area developed into a solid and broad-based expansion. The economy grew by 2.5% and by the end of the year had recorded 18 straight quarters of growth. This represented the strongest expansion for a decade, and the broadest for two decades. The dispersion of growth rates among euro area countries fell to its lowest level since the start of Monetary Union.

Robust growth ensured that the recovery in the labour market continued apace. Employment rose by 1.6% to reach its highest level ever, buoyed by record participation rates for women and older people. Unemployment fell to its lowest level since January 2009. Overall, 7.5 million jobs have been created since mid-2013, offsetting the total number of jobs lost during the crisis.

As in previous years, the ECB’s monetary policy played a central role in this recovery and convergence story. In 2017, past asymmetries in the transmission of our monetary policy largely disappeared and financing conditions stabilised at record lows across the euro area. This contributed to the strongest increase in the growth of credit to the private sector since the crisis began in 2008.

A less spirited assessment of the inflation backdrop notwithstanding, that’s a rather upbeat take on the European economy and it suggests the governing council is pretty goddamn pleased with themselves.

It looks like the upbeat tone is helping push the euro to session highs and the following bit from Draghi about the outlook for inflation is likely helping to make the case that the ECB is still on track to unwind APP in relatively short order (soft stop in September with the possibility of a taper to €10 billion/month through year end):

Looking ahead, we expect the pace of economic expansion to remain strong in 2018. While we remain confident that inflation will converge towards our aim over the medium term, there are still uncertainties about the degree of slack in the economy.

Here’s EURUSD:


Of course the question here is the same as it always was – namely whether the ECB has waited too long to start replenishing their ammo. Underscoring that worry is the following from BofAML and before anyone asks, yes I was holding on to these brief excerpts just waiting for a hook and the annual report gave me an excuse to post them:

Synchronized global growth was the buzzword of 2017 and generally expected to continue into 2018. However, global data surprises have turned negative for the first time since mid-2017, potentially due to forecasts being optimistic in the first place. While trade tensions have been widely cited as the reason for the drop in global equities, the realized weakness in global data may be a more straightforward explanation. Chart 1 depicts the stable relationship between MSCI World returns and global data surprises over the past five years.


Markets are assuming Euro zone data deterioration will be transitory. The immediate focus in terms of weaker data is the Euro zone, where data surprises are now the most negative since the peripheral crisis. There are two unknowns here – how much of this weakness is related to weather disruptions and how much reflects a convergence of soft survey data with the reality of weaker hard data. However, this also means the typical rationale for mean reversion in data surprises (economists revising projections) is unlikely to apply here if the weakness is being attributed to temporary factors. Upcoming data, particularly the April PMIs, will be crucial and the fact that EUR has been resilient to the data deterioration suggests the pain trade for markets will be if the weakness persists.

The rub is that more euro strength will only serve to exacerbate any negative trends in the data and if it persists for long enough, could dent the ECB’s confidence in the inflation outlook. A trade war wouldn’t help.

Now who’s ready for the March ECB minutes later this week?!



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