The December ECB meeting surprised in many ways. The new ECB staff projections were surprisingly downbeat as the midpoint of the 2013 growth projection envisaged a drop in EMU GDP of 0.3%, significantly weaker than the 0.5% increase of the September projection. The inflation projection was also lowered. The general tone of Mr Draghi’s comments suggested that the ECB was more open to the possibility of a further cut in its key policy rates than many in the market anticipated. Mr. Draghi acknowledged that a rate cut was debated as was the possibility of a negative deposit rate. The ECB said it is “operationally” ready to take such action. Ultimately, the ECB left rates unchanged, but it was clear that the ECB moved closer to further easing. Hopes on a January rate cut got a boost immediately after the December meeting, as reflected in the shift below zero of a large part of the eonia strip curve.
Market expectations cooled since, as ECB talk became less dovish, economic data no longer deteriorated and general market sentiment improved. Therefore, we think that the ECB will stay sidelined for now, keeping its powder dry for an eventual further sliding of the economy or a flaring up of the financial crisis in the euro area. It remains a close call though. However, we don’t expect that the ECB will backtrack on the dovish stance laid out by Mr. Draghi at his previous post-meeting press conference either.
Economic environment challenging, but no further deterioration
While we think the December ECB staff projections on growth were overly pessimistic, it is clear that the economic situation remains challenging. However, we think the ECB was overly pessimistic in December. Since, the euro eco data, with some forward looking quality, haven’t deteriorated. The PMI and EC business confidence data on the contrary improved in December for a second straight month. In the latest Commission survey, both the service and industrial sector showed improved momentum. We would qualify these results tentatively as part of a bottoming out process, not yet as evidence of an upturn. Consumer confidence was better too in December, but only for the first time and needs confirmation before drawing conclusions.
Signs of economic improvement have been somewhat more robust in China (Asia) and the US, which means that the odds are more than even for a global recovery which will slowly gain traction during 2013. HICP inflation stabilized at 2.2% Y/Y in December, marginally higher than the consensus estimate of 2.1% Y/Y, which is slightly disappointing as lower energy prices were offset by higher services and food prices.
Concluding, the eco data don’t exclude an ECB rate cut, but the hypothesis that a bottoming out process has started should keep the ECB sidelined. However, we don’t expect the ECB to talk more bullish on the economy. Much has yet to be done, growth prospects for 2013 remain very weak and the ECB is well aware that we had already a series of mini-cycles. This means that clouds can rapidly darken the brighter sky. So the ECB should at least wait for a much more concise body of evidence that the economy is on a firmer footing before changing verbal guidance.