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Aline Schuiling and Nick Kounis, from ABN AMRO, point out that today’s PMI  data signals ongoing weakness in growth. They expect the ECB to further push out its forward guidance on the period of unchanged policy rates and ongoing reinvestments.

Key Quotes:  

“The eurozone PMIs for April indicate that economic growth remained subdued at the start of the second quarter. The manufacturing PMI rose slightly (up to 47.8 in April from 47.5 in March), whereas the services PMI declined from 53.3 to 52.5.”

“At its current level it is consistent with GDP growing modestly, at the pace of around 0.1-0.2% qoq, which is roughly equal to growth in 2018H2 and around half the trend growth rate.”

“The PMI report seems consistent with our base case scenario that growth will remain well below the trend in the first half of this year with only a modest improvement in the second half. The slowdown in economic growth since the start of 2018 has also left its marks on the labour market. The employment component of the composite PMI has been moving lower since September 2018 and (at 52.9 in April 2019) is consistent with modest employment growth and a roughly stable unemployment rate.”

“We think that ECB forecasts for growth and inflation remain too high despite recent downgrades. Our base case is that ECB policy interest rates will remain on hold through to the end of 2020 and that reinvestments will continue to the end of 2021. Second, we think that the ECB will announce relatively easy terms on the new TLTRO-III in June. The pricing will probably be similar to TLTRO-II so banks can borrow at rates as low as the deposit rate if they meet certain lending benchmarks.”

“If rate cuts are off the table, then the ECB may revive what has been its main stimulus tool of choice over the last few years: QE. Indeed, we think the probability of QE-II has risen significantly, though it is not yet our base case.”