ECB In Focus As Euro Area Seeks Monetary Policy Guidance


In early trading on Tuesday the U.S. dollar is gaining against a basket of currencies and the euro has dropped to a one year low versus the dollar following weak manufacturing data in the euro area released on Monday amid persisting concerns about the threat of deflation in the 18 member euro currency bloc.

Deflation occurs when the inflation rate falls below 0 percent compared to disinflation which means a slow-down in the inflation rate.

The euro area registered just 0.3 inflation in August from 0.4 percent in July, the lowest level since 2009, and well below the ECB’s inflation target just below 2 percent while the unemployment level in the euro-area remained at 11.50 percent in July, matching June’s 11.50 percent, the lowest level since September 2012, according to Eurostat.

On Monday a Markit index of euro-area manufacturing showed a decline to 50.7 in August from 51.8 in July, marking the lowest level in 13 months as companies faced slower increases in total new orders and new export business due to economic and geopolitical uncertainties.

The Governing Council of the ECB will meet on Thursday September 4th to discuss interest rates and monetary policy issues.

Most economists believe there  is only a slim chance of a rate change with the ECB’s main refinancing operations (fixed rate) which is set at 0.15 percent, a record low, while the ECB’s overnight deposit facility has a negative rate of -.10 percent.

During a recent speech in Jackson Hole, Wyoming on August 22nd, ECB President Mario Draghi attempted to strike a complementary balance between reforming structural policies across national governments and establishing aggregate demand policies to help improve the 18 economies making up the euro area.

“The only conclusion we can safely draw, in my view, is that we need action on both sides of the economy: aggregate demand policies have to be accompanied by national structural policies,” Draghi said.

Draghi spoke about boosting aggregate demand through the first Targeted Long-Term Refinancing Operation (TLTRO) beginning in mid- September with strong interest coming from the banking community as the operation supports bank lending to the real economy.

Under the scheme, “banks will initially be able to borrow an amount equivalent to up to 7% of a specific part of their loans in two operations in September and December 2014,” according to the ECB’s website.

Afterwards, additional lending amounts can be borrowed in further TLTROs, “depending on the evolution of the banks’ eligible lending activities in excess of bank-specific benchmarks.”

“The additional borrowing allowance is limited to three times the difference between the net lending since 30 April 2014 and the benchmark at the time it is claimed,” the ECB wrote in a July press release.

U.S. Economic Calendar

On Tuesday ISM index data (August) will be released alongside construction spending (July).

On Wednesday Factory Orders, Fed’s Beige Book (Sept), Auto and Truck Sales (Aug).

On Thursday  ADP, Initial Claims, Continuity Claims, Productivity, ISM Services, Natural Gas Inventories, Crude Inventories.

On Friday Non-Farm Payroll (August) will be released. estimates 235,000 nonfarm payroll jobs and the unemployment rate holding steady at 6.2 percent.

-Johnathan Schweitzer




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