Mario Draghi made a few statements earlier this year that the economy is expected to recover gradually throughout the year, and a rate cut would be on the table for the time being. The recent financial condition in the Euro Zone might suggest the need for further easing measures.
To view Figure 4, please visit the following link: http://media3.marketwire.com/docs/fig4fxpr.jpg
Source: Bloomberg, FXPRIMUS
The worst-case scenario: Core economy affected by peripherals, such as Germany and France, slowing down.
The German Manufacturing Purchasing Managers' Index (PMI) and lower Business & Economic Sentiment Index indicated that the economy could possibly enter into a technical recession.
To view Figure 5, please visit the following link: http://media3.marketwire.com/docs/fig5fxpr.jpg
Source: Bloomberg, FXPRIMUS
Thus, pro-growth partisans could use the core economies' slow-down to undertake less fiscal consolidations and more pro-growth policies. However, the peripherals' yield turns lower sharply.
To view Figure 6, please visit the following link: http://media3.marketwire.com/docs/fig6fxpr.jpg
Source: Bloomberg, FXPRIMUS
With that said, no action from the ECB this week will spur recent lowering borrowing costs.
ECB event risk will be extremely high this week.
Around two-thirds of economists project a 25 bps cut for the ECB benchmark interest rate. In addition, investors expect the central bank to take measures to boost small- and medium-enterprise (SME) lending since it could be difficult for the rate cut to make much difference. We need to take reference on the UK's Funding for Lending Scheme (FLS).
More credit measures in the UK will target SMEs since M4 growth is still negative, although showing improvement.
To view Figure 7, please visit the following link: http://media3.marketwire.com/docs/fig7fxpr.jpg
Source: Bloomberg, FXPRIMUS
Last week, banks in the UK were encouraged to lend more by a few new measures:
1. The FLS is extended to another year to January 2015.2. Incentives increased by lending to SMEs, such as 10X multiple funding access in 2013, and 5X in 2014.3. Access to the FLS is extended to the non-banking credit group.
A rate cut just meets expectation; credit boosting measures are extra bullets.
-- The ECB lending survey to businesses released last week suggests deteriorating funding access for corporate companies.
To view Figure 8, please visit the following link: http://media3.marketwire.com/docs/fig8fxpr.jpg
Source: Bloomberg
-- Inflation is at 1.7% YoY, below the ECB's target at 2%, which supports the central bank to act more.
To view Figure 9, please visit the following link: http://media3.marketwire.com/docs/fig9fxpr.jpg
Source: Bloomberg, FXPRIMUS
-- Due to the "do whatever it takes" similarity between the ECB and BoJ, when the BoJ excises aggressive tools to get out of deflation, non- action from the ECB will reduce credibility for themselves.
U.S. - Ongoing debates on recovery
