What Might the ECB Say on Thursday?

October 5, 2010

In September, the ECB press conference was a bit more dovish than expected, but data and verbal remarks by officials in the subsequent five weeks have led some analysts to see that shift reversed this month.  The timing is not good for doing that.  Other governments and central banks, including in the United States, are doing whatever it takes to promote a softer currency.  As the natural foil to the dollar in reserve asset portfolios, the dollar’s loss has been the euro’s gain, and the common currency is presently trading up 8% against the greenback and 4% higher in trade-weighted terms since the September meetingMore hawkish rhetoric risks boosting the euro unduly further.  Conversely, euro appreciation over the past month reduces the urgency of enacting measures to tighten monetary conditions.  ECB staff forecasts are not scheduled to get reassessed until December, so October is not a natural month to make a lot of news on the monetary policy front.

The latest round of European PMI survey results point to increasingly polarized growth in the region and, on the whole, a surprisingly abrupt showdown in the rate of positive growth at the end of the third quarter.  That’s not surprising, since industrial orders sank 2.4% in the first month of the quarter.  Inflation was at 1.6% in August, but core inflation was below that at 1.0%.  Labor cost pressures are their lowest since at least 2000.  Indices of sentiment have been resilient.  Overall economic sentiment according to the EU Commission measure printed at 103.2 in September, best since January 2008. Real retail sales fell 0.4% in August after edging just 0.1% higher in July.

Other considerations are the strain on the region’s banking system.  Doubts simply will not go away that the stress tests from last spring were too lenient.  President Trichet has conceded that weaning banks away from emergency liquidity is going to take time.  More national bonds of Ireland and other peripheral governments had to be bought this week by the ECB than in recent prior weeks.  On the other hand, just 59% of maturing liquidity from special term repos was rolled over at the end of September.  Where possible, officials are moving forward with the tasking of mopping up liquidity.  I expect to see a balanced approach on Thursday, as officials try to minimize market reaction.  The usual buzz words will be retained in the formal introductory statement that Trichet always reads.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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