Eurozone CCI at 16-Year High

Eurozone consumers continued to gain confidence in October, which should reassure European Central Bank policy makers that the economic recovery is set to remain robust as they prepare to take a key decision on the future of their bond-buying program.

On Monday, the European Commission said its monthly measure of sentiment rose to minus 1.0 from minus 1.2 in September, its highest level since April 2001, MarketWatch reported.

The steady rise in confidence index over the last 12 months has been driven by greater optimism about the outlook for the eurozone economy, which has experienced a tumultuous decade as first the global financial crisis and then the currency area's debt troubles caused two periods of contraction.

The eurozone economy has been growing since mid-2013 and the pace of its recovery has picked up in 2017. To policy makers at the eurozone's central bank, that suggests they can safely withdraw some of the stimulus they have been providing over recent years. The ECB's 25-member governing council is expected to announce Thursday that it will reduce the amount of bonds it buys from January.

"With the recovery well on track, a reduction of the ECB's monthly asset purchases seems to be a foregone conclusion," said Oliver Rakau, an analyst at Oxford Economics.

ECB watchers believe that will mark the start of a process that will bring an end to bond purchases in 2018 and a rise in the key interest rate by the end of this decade. Oxford Economics expects the first rise in the deposit rate—which stands at minus 0.4%—at the start of 2019.

The strengthening of sentiment suggests consumers have taken that prospect in their stride and are confident the recovery can survive a reduction in support from the ECB. That confidence in turn aids the recovery, since more upbeat consumers tend to spend more freely.

As in previous months, eurozone consumers appear to be untroubled by higher levels of political uncertainty. German elections held in September saw the nationalist Alternative for Germany party win nearly 13% of the vote and a place in parliament for the first time. In Spain, leaders of wealthy Catalonia are pushing for independence.

Credit Demand Rising in Q4

Banks in the eurozone expect demand for corporate loans, consumer credit and mortgages to rise further in the final three months of 2017, the ECB said on Tuesday in its quarterly lending survey, Reuters reported.

Demand for loans has been rising steadily for years as access to credit became easier, driven in part by increased competition among banks and cheap wholesale and retail funding.

In the last three months of the year, banks are set to keep their credit standards on corporate loans broadly unchanged but households’ access to consumer credit and housing loans may ease further, the ECB said based on its poll of 134 banks.

In the third quarter, credit standards for corporate loans remained broadly unchanged, despite expectations for easing but they eased for mortgages and consumer loans, the ECB added.

“Competitive pressure, banks’ risk perceptions, and cost of funds and balance sheet constraints had an easing impact on credit standards on loans to enterprises in the third quarter of 2017, while banks’ risk tolerance had a tightening impact,” the survey showed.

Euro Holds Ground

A series of eurozone economic data are providing one of the final tests for investors’ expectations for monetary policy changes in the eurozone ahead of this week’s monetary policy announcement from the ECB.

The euro is holding its ground, up 0.1% at $1.176 as purchasing managers’ indices for the shared currency area are published throughout the morning. The measured feel to trade is evident in capital markets, where yields on the currency area’s sovereign debt are also steady.

October could well turn out to be a hugely important month for the euro. The euro is on a very robust uptrend against most other currencies, and it has taken a pause in the last 2 months. What the euro needs is a catalyst for it to continue its resurgence, and the ECB could well provide one.