Recently, the mantra of the president of the European Central Bank (ECB), Mario Draghi, has been that he and his colleagues must wait and see if the measures they have already taken to attempt to pump up inflation in the Eurozone are working before they embark on the purchase of sovereign bonds for this purpose, which would amount to full-scale Quantitative Easing (QE). From our standpoint it would also tend to further weaken the Single Currency.
Much as the governing council seems to be amenable to what they term “extraordinary measures”, they nevertheless face powerful objections from the German central bank, which has an inordinate fear of inflation.
But time passes and events catch up. A major development has been the disappointing take-up of the Targeted Long-Term Refinancing Operation (TLTRO), which was designed to make cheap money available to banks by auction. The idea then is that the banks would lend it out to businesses, stimulating the economy. The second TLTRO auction took place yesterday, but the amounts taken up by the financial institutions for both have fallen well short of the target. Many commentators now see this as yet a further sign, along with continuing falls in energy costs, that negative inflation could be just around the corner, and that there can be no more waiting and seeing before the trigger is pulled on full-scale QE in the Eurozone.
Under a new schedule for ECB monetary policy meetings, the next one will take place on January 22nd 2015 and there will not then be another until March 5th (in Cyprus – and no, they’re not getting tired of the spanking new headquarters in Frankfurt already. They have a policy of rotating the meeting around the member states, from time to time).
All systems go in the USA
Meanwhile, on the other side of the Atlantic, it was all good news as far as yesterday’s economic reports were concerned - exports were up, the value of imports was down, retail sales showed an increase in November, initial jobless claims were down, and business inventories declined, indicating a greater utilisation of materials.
There is no doubt but that the rapid fall in energy prices, and oil in particular, beneficially affected nearly all of these measures. The USA still imports some crude oil, retail sales are buoyed by the feel-good factor for consumers of having to pay less for fuel (“gas” as my American friends might say), and less people are laid off as business energy costs fall.
The US dollar responded accordingly, making up ground against most of its major counterparts.