While the ECB had announced new monetary easing measures on 3 December, it said on Thursday 21 January that it will need to reconsider its monetary policy at the March Governing Council (a message on which all governors, including Jens Weidmann, are unanimous). How can the global perception of one of the world's largest central banks have changed that much in 49 days?
Questions about a possible more pronounced slowdown of the global economy sent the equity markets and the credit markets spiralling since the beginning of this year. The rise in risk aversion pushed up the traditional safe havens: the yen is back to its highest level for more than one year and the US 10-year yield is close to 2%. Incidentally, profit growth for US companies during the cycle was essentially the result of expanding margins, which hit record levels thanks to strong cost contraction and very weak wage growth. Thus profit growth is now extremely sensitive to sales trends and the outlook is hobbled by the US dollar's appreciation and the drop in oil prices. Investors are all the more worried by the outlook of profits growth as the balance sheet of US companies worsened (financing of mergers and acquisitions and share buybacks). In Europe, the leverage ratio is lower but profit growth may be dampened by any appreciation of the euro. For the ECB, the volatility of the markets constitutes an unwar-ranted tightening of financial conditions.
So for an economy like the Eurozone's, which is still fragile, all it took was 49 days for the picture to get a bit bleaker. On 10 March, the ECB will be duty-bound not to disappoint, and, as we have seen, a cut to deposit rates and a time extension on its QE will not be enough.
Valentine AINOUZ, Bastien DRUT
Bastien Drut & Valentine Ainouz
Strategy and Economic Research at Amundi