ECB comments and data show the ECB is stuck between a rock and a hard place
(Kitco News) - This morning we have heard from the Vice-President of the ECB, Luis de Guindos. He sounded pretty bullish on the European economy saying "We expect a strong activity increase in H2". He then added the ECB's mandatory note of caution saying that uncertainty remains high and that it is better to "err on the side of prudence" when it comes to withdrawing stimulus.
Interestingly the Vice-President added that Eurozone inflation could be higher than 2% at the end of the year and next year there will be new moderation in inflation. He also said that the 2021 inflation increase is due to temporary factors.
This all comes after the Fed meeting last night. The Fed kept rates and QE unchanged but there was a note saying that now is not the right time to remove or taper stimulus. The BoC has been the first to move but commodities prices have recovered very well and the Canadian economy is very linked to the health of the commodities markets. This leads us to think about how long will it take for the other major central banks to act and will growth be sustainable enough to support the withdrawal or taper of the mammoth amount of stimulus in the system. Once it seems that the central banks are ready there always seems to be a change in the targets or the goalposts get moved. Now it is the employment mandate which is the key metric to watch when before the pandemic it was the never-ending pursuit of the 2% inflation target. Only time will tell if the Fed and ECB move rates higher when employment levels return to more normal levels and if inflation remains near the current levels. For me, the jury is still out.
Elsewhere in Europe this morning, Eurozone industrial confidence for April hit 10.7 vs the analyst estimates of 4.0 and the previous reading of 2.0. Eurozone services confidence for the same month grew massively to print at 2.1 vs estimates of -8.5 and the previous reading of -9.3. The EU Commission also added that Eurozone April consumer inflation expectations grew to hit 19.6 ss 18.6 In March. With the current rise in inflation producer price expectations rose to 24.1 vs the revised figure of 17.5 In March. These are very interesting metrics as confidence and inflation projections are getting much higher. As the respective nations move out of the pandemic it seems that many economies can build from the ground up.