GIORNALE3

Viewpoint: The ECB unanimously believes it is too early to start discussing an exit strategy

The May meeting of the ECB came to an end with stable rates, no developments in terms of non-conventional measures, and a broadly unchanged (slightly more dovish) rhetoric……


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The ECB unanimously believes it is too early to start discussing an exit strategy, while on the other hand it seems to have few tools in its bag with which to ease market tensions. US labor market: weak employment, falling unemployment.
In the press conference, Mr. Draghi said that the Governing Council did not discuss an interest rate cut, and that monetary policy stance remains accommodative, as nominal rates are low, real rates are negative, and liquidity is abundant. Draghi did not make any particular remark about the future use of the SMP, and simply commented that the programme is still in place, but is temporary by nature. The ECB confirmed its central scenario, based on which economic activity is stabilising at modest levels, with downside risks to the economic outlook still in place (mostly tied to the development of the debt crisis); according to Draghi, April data (mostly characterised by a sharp drop of PMI indices) are not sufficient to alter the scenario, which may only be assessed more accurately next month. According to Draghi, uncertainty on the scenario is higher than a month ago. Inflation risks are viewed as balanced, and upside and downside risks on the inflation outlook are considered with the same importance whereas a month ago there was an accent on short term upside risks coming from energy.
Draghi let on that the ECB, before deciding whether to launch a new round of LTROs, is waiting to assess the effects of the latest auction (settled on 1st March), and the latest developments on credit trends in particular. To sum up, the conference did not bring any substantial change in monetary policy stance, but the tone seemed to us slightly more dovish than a month ago, regarding risks to both the economic and the inflation outlook. In short, going forward, we think interest rates may stay put in the foreseeable future. The ECB may opt to bring down slightly the deposit rate, in order to discourage the “parking” of funds with the central bank, but a majority vote on this issue within the Council should not be taken for granted (on the other hand, cutting the refi rate could have little or no effect on the economic cycle in the current phase). We believe the full allotment regime will be left in place not only in the next quarter (to be announced at the June meeting) but probably until early 2013. The only tools the ECB seems to have in its bag are new 36-month LTROs and further asset purchases. However, the central bank seems reluctant to use any of them, and could be prompted to do so only in the event of a further, significant rise in financial tensions.
The April Employment Report confirmed the slowdown in job creation, compared to December-February (250k). Non-farm payrolls increased by 115k, and the figures for the previous two months were revised upwards by +54k. In the manufacturing sector, jobs increased by 16k, falling short of the average over the previous four months (37k); job growth was negative in the construction sector for the third month in a row (-2k), after a string of inflated monthly changes thanks to favourable weather conditions. Private service jobs increased by 116k, vs. +128k in March, falling short of the average for the November-February period (180k). The public sector shed jobs again, with a -15k decline. The household survey pointed to a new drop in employment (-169k), from -31k in March, marking a correction following an average growth of 450k between December and February. The labor force contracted by 342k, and the participation rate was at a 30-year low of 63.6%. Therefore, the unemployment rate dropped further, to 8.1%. The unemployment rate including discouraged workers and workers with parttime jobs for economic reasons, was stable at 14.5%. Hourly wages were unchanged (1.8% y/y) and hours worked increased modestly (+0.1% m/m). On the whole, data are mixed and confirm a modest employment trend, consistent with GDP growth between 2% and 2.5%. The ongoing decline in the participation rate makes life hard for the Fed’s decisions. The central bank will stay on the sidelines, waiting to assess the labour market outlook for a few more months.

Appendix

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