December 9, 2019
On Friday we talked about the big ECB meeting on the agenda for Thursday.
This will be Christine Lagarde’s debut as ECB President.
She inherits the job after a decade of global stimulus that has left the eurozone economy running at 1% growth and 1% inflation.
Her predecessor, Mario Draghi, recently restarted another bond buying program (QE) in Europe, with no clear end in mind. And that’s not only because of the sluggish economy, but because the economy has been deteriorating from weak levels.
Friday’s German industrial production data was a good example (chart below) …
We already know that Lagarde is making her plea to eurozone lawmakers for fiscal stimulus, with hopes to follow the leads of the U.S., and most recently Japan (which just announced the intent to launch a quarter of a trillion dollars worth of fiscal stimulus).
But will she do something more aggressive and creative on the monetary stimulus front? Over the past few months, we’ve discussed the prospects of the ECB following the path of Japan, by outright buying European stocks.
It all boils down to the risks of the trade war ramping up in Europe. As we’ve seen, global central banks (namely the Fed and ECB) made the mistake last year of ignoring the potential outcomes from the trade war. The markets threw a penalty flag on them, and this year, they’ve been reversing course and positioning for the worst-case scenario. There is far less downside from being positioned defensively and getting a positive surprise, than trying to react to a negative surprise.
With this ECB meeting coming down the pike, let’s take a look at the recent trends in some key European data.
You can see, the trough in economic sentiment in Europe was back in 2012, when Draghi came to the rescue to ward off a debt default in Italy and Spain. The ECB became the “do whatever it takes” backstop against all risks. And confidence came roaring back. But sentiment/ and the outlook turned when Trump launched tariffs on China.
Similarly, the PMIs in Europe topped out and have been on the slide since Trump acted early last year on his tariff threats.