Eurozone ESI economic confidence was much weaker than expected, with the headline number falling back to just 103.3, the lowest result since August 2016. Bloomberg consensus expectations had been for a more modest decline to 104.8, and while the May number was revised up slightly to 105.2 from 105.1, this still left the average for the second quarter at 104.1, down from 106.3 in the first quarter, which backs expectations for a marked slowdown in growth in Q2, from the better than expected 0.4% q/q growth rate in Q1. Germany in particular is struggling with the impact of rising geopolitical trade tensions and ongoing Brexit uncertainty and today’s ESI reading will add to the arguments for further easing measures from the ECB in coming months.
Earlier, in Germany there was a marked tweak in inflation data as German state inflation data was higher than expected. Data from six German states released ahead of the preliminary German number due this afternoon showed headline rates up 0.1-0.5 percentage points, which suggests a slight uptick in the HICP rate, against expectations for an unchanged number. This will counterbalance the unexpected dip in the Spanish HICP rate, although even a slight and unexpected rise in the overall Eurozone HICP will likely leave the headline rate firmly below the 2% target and won’t be sufficient to prevent the ECB from heading for further easing measures.
Those easing measures are expected as soon as September. The latest Bloomberg survey on ECB expectations shows that the majority expects the central bank to flag additional easing measures at the July council meeting and then deliver a cut in September, little more than a month before Draghi leaves office. The change in expectations is hardly a surprise after Draghi signalled last week that downside risks to growth and inflation have now materialized and that further action will be needed if there isn’t a substantial improvement. That there is a miraculous recovery, however, seems very unlikely at this stage, as even if there is once again hope of progress on the US-Sino trade front the question since last week hasn’t been if, but when and with what measures the ECB will act again.
The morning data has seen the EUR on the move; EURUSD touched 1.1338, EURJPY found resistance at R1 and an eleven day high at 121.85 and EURGBP slipped back to 0.8950.
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