ECB guidance will again become more data-dependent – Nomura

Analysts at Nomura explained that as the ECB guidance will again become more data-dependent gradually, the ECB’s assessment  on  the economy and inflation outlook will also become more important again.  

Key Quotes:

From this point of view, recent speeches made by  Mr.  Couere,  Mr.  Praet and President Draghi all made important points. First,  Mr.  Couere suggested that Taylor rule-based estimates on the appropriate policy rate are now at levels similar to actual policy, suggesting unconventional policies are now unnecessary. Policy normalization is well supported by fundamentals.  

Second,  Mr.  Praet suggested that the persistence of wage increases are important to see the transmission of rising wages to price inflation. While the negotiated wages in Q2 accelerated, the next wage data are crucial for the ECB’s policy stance into 2019. Third, President Draghi said yesterday that labour markets are tightening with signs of “labour shortages in some countries and sectors.” While the introductory statement at the previous meeting already implied the ECB’s assessment on the economic slack has improved, his comments suggest that the slack is more likely to be absorbed (see “ECB: Slowly reducing the accelerator”, 13 September 2018). This is important, as the ECB may now see inflation and wage pressures, even if growth is just around its potential growth rate, and recent growth of 0.4% q-o-q may be enough to generate inflation pressures. In this regard, President Draghi’s relatively optimistic assessment of the inflation outlook, “a relatively vigorous pick-up in underlying inflation,” looks quite reasonable. In the short term, calendar-based guidance is still valid and Italy’s politics will be also major uncertainty for the EUR outlook.  

However, redenomination risks of EUR remain historically low and foreign investors can just shift away from BTPs into other EGBs without much of an FX impact.  

Thus, as we avoid an escalation in Italy’s political uncertainty, we expect EUR to trade strongly gradually and ECB officials’ communications to suggest that a return to “data-dependant” stance will support EUR appreciation. In terms of data, wages are crucial.”