Super Draghi, a Central Banker with the tools to wipe out the risk of deflation, strengthen the European economy, and provide short term stability to bond investors… and he doesn’t even have to rescue a princess or race go-karts…
Okay, so it was a bit of a stretch, but you can’t say I didn’t try.
Europe has been continually suffering concerns regarding deflation. Last week’s release of 0.7% year over year European CPI[1] did not help matters. The European Central Bank (ECB) President Mario Draghi has made reference to looking into a monetary stimulus package similar to that of Quantitative Easing (QE), the strategy that the US is currently ‘Tapering’. There are differences in the way that it would have to be implemented, which may be causing delays in the announcement of such a program.
It will be interesting to see the EU incarnation of QE. The US version was built on the premise of the Federal Reserve purchasing Treasuries and mortgage obligations; which as a result increased money in circulation and created great liquidity in a stalled economy. The EU, while having a unified currency, does not have a unified sovereign bond offering (like the Treasury). They shouldn’t, as this is a means for each member nation to raise funds through debt offerings for their own needs. ECB efforts will more likely than not have to be tied to member nation banking institutions.
By making a QE effort targeted towards member nation banks the ECB can create liquidity for those banks, increasing lending, and allow business conditions to improve for borrowing corporations. These improved business conditions should lead to improved consumer confidence, spending, and a re-emergence of inflation, at least nominally. There will most certainly need to be strings attached to the program in order to ensure the funds get used by member nation banks appropriately; and yet another reason that the release of such a plan takes time.
This week in the market
US markets responded well to much positive data, such as[2]:
– Better than expected retail sales, 0.7% month over month
– Decreasing business inventories, 0.4% month over month
– Continued weak inflation, Core CPI 1.7% year over year
– Improved industrial production, 0.7% month over month
– Improved housing starts, even though they were below expectation, 946K
First quarter earnings season is underway with mixed results thus far. Expectations for performance may be fairly off this quarter as severe weather throughout much of the country during the first quarter made it difficult to predict business conditions. Don’t be surprised by a very bumpy ride (in both directions) for the next few weeks.
Meanwhile, China announced 1st quarter GDP at 1.4% which is 7.4% year over year. While this is below its predictions of 7.5%, it was above expectations of 7.3%[3]. This could signal concern that the Chinese Government may not seek a way to stimulate their economy, but it is still too early to tell.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment. Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.