Can You Say ‘Quantitative Failure’? Fresh Evidence Of Eurozone Economic Deceleration Raises Uncomfortable Questions

Well, guess what? There’s new evidence to support the contention that the Eurozone economy may have peaked in Q1, although I’m sure the ECB is still sticking with the “transitory” narrative because you know, what else are they going to do at this point? Admit that the dreaded “quantitative failure” is in the cards?

The IHS Markit composite PMI fell to an 18-month low of 54.1, in May, missing estimates of 55.1:


The euro, which had already knee-jerked lower a half hour earlier on similarly weak PMIs out of Germany, failed to gain any traction in a pretty clear sign that the market is beginning to doubt whether the slowdown in Q1 was in fact only fleeting.


Again, this raises still more questions about the viability of the ECB’s plan to call an end to APP in September or at the very least, to taper monthly purchases to some “token” amount (and that’s a relative term when it comes to QE) from September through December.

“The slowdown is unlikely to stop the ECB from bringing its monthly asset purchases to a halt by the end of this year,” Bloomberg economist David Powell said on Wednesday, following the data.

That may be true, but you also have to factor Italy into the equation. If things don’t calm down there and if the new populist government pushes the envelope when it comes to fiscal profligacy, the bloc-wide economic slowdown could collide with widening periphery spreads.

At the very least, that would create a rather daunting communications challenge for the ECB when it comes to telegraphing an end to APP without catalyzing a spike in rates vol. or otherwise destabilizing an already precarious situation. For more on that, see:

Even without the Italian jitters, you do not want to be tightening policy into a slowdown and again, this just underscores the risk inherent in persisting in accommodation for years upon years: when the next downturn inevitably comes calling, you’re still mired in NIRP and you’re still sitting on a bloated balance sheet. What do you do then?



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