This is the NFP week and market participants always prepare for it as the jobs data in the United States triggers ample market moves. But this week differs from other NFP weeks for at least two reasons.
One is that the President of the United States and the First Lady tested positive for COVID-19. Another is that the Eurozone Core CPI flash estimate dropped to a historic low.
So much was written about today’s inflation data in the Eurozone that it took no one by surprise. That is, not one but the ECB.
The problem comes from the previous ECB meeting. Staff projections showed inflation much higher, in total disagreement with what the market already knew.
Today’s core inflation data printed 0.2% after the previous release showed 0.4%. This is the lowest ever reading for core inflation in the Euro area. What does it mean?
QE. More of it, and quicker that many have thought.
More QE From the ECB
Truth be told, the ECB already prepared market participants for the eventuality of a lower inflation data. In fact, Vice-President De Guindos stated that even a drop into negative territory is possible.
Why is this troublesome for the central bank? Why a fall in prices from one period to another is something that a central bank cannot fathom?
The problem comes from the lack of economic growth when this phenomenon happens. Lack of economic growth leads to fewer jobs and more troubles down the road. Also, lower prices postpone consumption, and that triggers or deepens an economic recession.
Today’s data implies that the ECB will act this year. Because it already has the deposit facility rate below zero and yet inflation threatens to become deflation, it is unlikely that the ECB will move the rate even lower.
Therefore, the good old QE comes to the rescue. The ECB is poised to do more this year, or else it will send the wrong signal to markets.
All other central banks face the same situation, but the ECB is trapped having already set the rate below zero for several years now. Hence, other central banks look at the ECB experiment with the negative rates and take notes.
However, when will the ECB act? The chances are that it will do so at the December meeting.