The Week In Hindsight, 20 June 2014

European indices followed their global counterparts higher last week as an ongoing spate of poorer than expected economic numbers led Janet Yellen, Chairwoman of the Federal Reserve, to revise downward the economic growth outlook for the US economy. Revised expectations now see GDP growth for 2014 coming in somewhere between 2.1 and 2.3% vs the previous forecast for growth at or around the 3% level.

In addition to the revisions for US growth, continental data continued to indicate lackluster conditions in some of Europe’s largest economies. This was as German economic sentiment under performed against expectations for the sixth consecutive month, while producer prices also contracted for the third month running.

News of the faltering German economy came just days ahead of the monthly ECOFIN meeting of euro-zone finance ministers. It was here that mixed views and opinions of the ECB’s recent policy decisions were aired in public.

Christine Lagarde, the head of the IMF, followed on from the findings of a consultation paper released by the international body earlier in the same week by saying that “the ECB should consider a large-scale asset purchase programme, primarily of sovereign assets, should inflation remain too low”.

This was while Benoit Coeure, Executive Board member of the ECB, stated that he and the governing council at the ECB saw no need to explore further policy options at the present time. This was given that inflation forecasts continue to see a rebound in price pressures over the coming quarters and considering that the bank has already taken drastic action.

ECB President Mario Draghi lent further support to his colleagues comments, when interviewed for a continental newspaper article, by stating that the ECB is ready to act further if it becomes necessary, but that the present focus is on monitoring the effects of existing measures.  

While the crisis years of 2011/ 2012 have certainly passed, the euro-zone is far from being fully out of the woods yet. Although the bloc as a whole is expected to demonstrate some form of positive growth for the year, downward pressure upon prices remains a concern and peripheral governments continue to face significant challenges in efforts to de-leverage and re-balance their economies.

As a result, the current fixation of investors and traders upon European monetary policy is unlikely to recede, leaving equity markets with a bias toward the upside over the weeks and months ahead. The morning sees French and German flash manufacturing numbers announced, while later in the week the German IFO Business Climate survey and Prelim CPI figures will be scrutinised closely by investors.