Markets
“I would warn against moving too far, that is into accommodative”. ECB Executive Board member Schnabel broke ranks with the dovish current inside the central bank in place since this summer. Given the inflation outlook, Schnabel thinks that the ECB can gradually move toward neutral if incoming data continue to confirm the ECB’s baseline scenario. She believes that neutral is somewhere between 2% and 3% with the current deposit rate (3.25%) being not so far from these levels. The ECB’s October lending survey highlighted that banks no longer think that rates are holding back loan demand while the housing sector seems to be bottoming out. It’s evidence that the impact of the ECB’s restrictive policy is fading visibly. We must add that more dovish governors see neutral more near the lower bound of Schnabel’s estimate. Her strong preference to a gradual approach means ruling out half-point moves, an idea EMU money markets are still contemplating. Schnabel’s argumentation isn’t just about upside inflation risks. She’s confident of reaching the 2% target next year, but warns that the road will be bumpy. Instead, the ECB Board member highlights the discrepancy between survey-data, heavily influenced by uncertainty stemming from political troubles and Europe and Trump’s election victory, and hard data which gives her confidence on a consumption-driven recovery. From a more technical perspective, she doesn’t want to use valuable policy space that will be needed in the future when the economy is facing shocks that monetary policy can deal with more effectively. The front-end of the EMU swap curve slightly underperforms (2y: +2 bps) on Schnabel’s comments, but the impact could have been bigger given the aggressive ECB cuts that money markets are still discounting. For the next three meetings, they count on nearly 100 bps of cumulative rate cuts meaning at least one larger move. The rate bottom end 2025 lays below neutral at 1.75%. Schnabel’s comments nevertheless raise the stakes for tomorrow’s national and Friday’s EMU November CPI inflation numbers. Risks could be asymmetric with the bigger corrective move coming on higher inflation numbers. US Treasuries outperform today with yields correcting 4.5 bps to 7 bps lower, the belly of the curve outperforming the wings.
The single currency managed to put aside some worries (tariff threat, risk of collapsing French government,…), backed by the more hawkish ECB rhetoric. EUR/USD recovered from 1.0480 to 1.0525 in first instance. As US eco data were published, a sniff of USD weakness even propelled the pair to 1.0580. Traders pared some positions going into tomorrow’s US public holiday (Thanksgiving) and thin trading on (Black) Friday. Final revisions to Q3 GDP showed marginally weaker personal consumption (3.5% Q/Qa from 3.7%) and a slightly softer core PCE deflator (2.1% from 2.2%). Mixed durable goods orders (ranging between -0.2% and +0.2% M/M depending on the metric) and weekly jobless claims (stable at 213k) were too close to expectations.
News & Views
The Czech National Bank published a concluding statement after the IMF’s article 4 mission to the country. The IMF assesses that the Czech economy is slowly regaining ground after unprecedented shocks with the country transiting from heavily manufacturing-based, export-oriented growth to a more mature and diversified economy. A prudent policy mix has underpinned a return to price stability while preserving fiscal and financial buffers. The IMF expects inflation to converge back towards 2% in 2025. Risks to growth are seen to the downside while risks to inflation appear balanced. The IMF staff sees ground to lower the policy rate further to a neutral level estimated at around 3%. They also suggests the central bank to gradually give way to forecast-based inflation targeting and react less to the latest incoming figures. Simply put, with inflation expectations well anchored, the CNB should no longer be upset by temporary increases in inflation caused by factors outside its control – for example, food or fuel prices. Finally, they also suggested that there is room for the CNB to gradually further reduce the size of its balance sheet, in particular the large currency reserves (+ 40% of GDP) to help limit the risk to the CNB’s financial position.
