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European Confidence Firm
World Economy

European Confidence Firm

Eurozone economic confidence rose for a second month in May as the European Central Bank prepares to present updated economic projections that could provide further clues about the impact of its stimulus program.
An index of executive and consumer sentiment increased to 104.7 from a revised 104.0 in April, the European Commission in Brussels said on Monday. That’s the highest level in four months and compares to a median estimate for an increase to 104.4 in a Bloomberg News survey of economists.
ECB officials meeting in Vienna on Thursday are expected to keep their ultra-loose policy unchanged again after they expanded quantitative easing by a third to €80 billion ($89 billion) in March and cut the deposit rate further below zero.  ECB’s Vice President Vitor Constancio said last week that he’s optimistic the ECB will reach its inflation goal by 2018, reflecting the upgraded stimulus and rising oil prices.
Sentiment among consumers rose to minus 7.0 from minus 9.3 the previous month, the report showed. Confidence in retailing and construction improved as well, while a measure for industry remained unchanged and a gauge for services declined.
In March, the ECB forecast eurozone growth of 1.4% this year, 1.7% in 2017 and 1.8% in 2018, with inflation of 0.1%, 1.3% and 1.6%, respectively. Asked in a Bloomberg Television interview whether he thinks consumer prices will rise faster in two years than currently predicted, Constancio said he “certainly personally expects” so.

  Challenge to Draghi
Rising oil prices may see the ECB upgrade its inflation forecast when it meets on Thursday, while striving to keep the door open for further monetary policy loosening if necessary, CNBC reported.
“Given the recent oil price rise, a key question is to what extent the ECB will raise its inflation projections for 2016-2018 and what this might signal for its quantitative easing policy after March 2017,” UBS bank economists said in a report on Thursday.
ECB President Mario Draghi will need to tread a careful line after some upbeat data this month. A flash official estimate showed eurozone economic growth averaged a seasonally adjusted 0.5% in the first quarter of the year, versus the previous quarter. This marked a gentle acceleration from the previous year, when growth averaged 0.3% in both the third and fourth quarters.
Plus, a two-month upturn in oil prices saw Brent and WTI crude oil top $50 per barrel on Thursday and remain above $49 on Friday.
However, overall inflation remains very low and the eurozone slipped back into deflation in April, with prices declining on the year by 0.2%.

  Ratings Growth
On Wednesday, Fitch Ratings increased its growth forecast for the eurozone by 0.1% to 1.6%. It said household spending was supported in the 19-country currency union by labor market improvements, continued growth in bank credit—and low headline inflation.
The ECB held monetary policy unchanged last month, with the main refinancing interest rate at 0.0%, the deposit rate at -0.4% and its monthly asset purchases at €80 billion.
This followed the surprise announcement of new stimulus measures in April. These included an increase in the ECB’s monthly asset purchases and an extension in the program to include corporate bonds from June.
From next month, UBS estimates 1,289 corporate bonds with an outstanding value of €756 billion will be eligible for purchase. In a report on Friday, the bank suggested €12 billion or 15% of the ECB’s total monthly purchases would be corporate bonds, with a split of around 30:70 between the primary and the secondary market.
UBS said the impact on corporate bond pricing would be “negligible.”
Meanwhile, EUR/USD posted small gains on Monday, after the pair considerable losses in the Friday session. The pair is trading at 1.11, close to 10-week lows.

 

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