It’s almost as if the markets have a sense of humour. While Mario Draghi walks his olive groves in Siena and Angela Merkel basks in the afternoon heat of Ischia… the markets choose this opportunity to wobble. We note that 09 August 2007 was when the first problems with the inter-bank lending market reared their head – while the cats are away…… Could it have been that 26 July 2012 when Draghi uttered those three little words (no not those ones but “whatever it takes”) he was in part motivated by delivering European leaders a good summer break. Either way he bought himself two years. Now the markets are getting twitchy want to see the colour of his money just as the peaches ripen. How inconvenient….
With inflation running at just 0.4% per annum across the Eurozone and growth non-existent in both Italy and France, we are in clear stagnation territory across much of Europe. We may be approaching the point of no return for Quantitative Easing, data from Germany over the last few days may yet prove to be the most important yet in swaying opinion amongst those who really matter. In terms of timing, we expect little action from the ECB this month while the Verdicchio is at risk of overheating. Expect to see a very European version of QE in September – and an explanation manual to match the volume of that summer reading list.
By contrast the MPC should announce at noon that it has 9 members which in the current climate of departures from the Bank would be more noteworthy than an announcement that rates will remain unchanged for a 65th successive month (just read that back if you don’t think we live in incredible times!). All eyes are on next week’s quarterly inflation report for signs of the Bank’s estimate of the output gap and of any leading indicators for a pick-up in wage inflation. With prices benign, problems brewing over the channel and early signs of moderation in the UK housing market we still expect it to be into 2015 before we see the first UK rate rise.