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18 Nov 2015
EUR: Weak wage data backs up ECB concerns - MUFG
FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, notes that the market certainly seems pretty well positioned for an easing by the ECB on 3rd December and the comments from ECB Executive Board member Praet have been particularly powerful in encouraging the market into positioning for perhaps a larger than expecting easing in the monetary stance.
Key Quotes
“To express concerns over the credibility of the central bank and indicate the possibility of a “de-anchoring” of inflation expectations is a clear signal of growing concern within the ECB. European equity markets posted strong gains yesterday on the back of growing expectations of more aggressive monetary easing by the ECB.”
“Data released yesterday by the ECB will only reinforce these ECB concerns. Quarterly data on negotiated wage rates revealed an annual increase of just 1.6% in Q3, up from 1.5% in Q2 and 1.4% in Q1, which was a record low. The average rate for this calendar year looks like it is heading for the lowest on record. The euro-zone unemployment rate has started to drift lower but at a painfully slow rate. Crucially, the ECB assumes that slow pace of improvement is set to continue – the ECB expects the unemployment rate to average 10.6% next year and 10.1% in 2017. The current rate is 10.8%.”
“Wages are one of the crucial components of lifting underlying inflation pressures – something we believe is beginning to play out in the US and will soon follow in the UK. However, the frustration for ECB officials is that government action on reforming labour markets has been slow and hence the heavy lifting to limit downside inflation risks is left in the hands of the ECB. That will be abundantly clear on 3rd December with an obvious offset to weak wages over the short-term being a weaker euro.”
Key Quotes
“To express concerns over the credibility of the central bank and indicate the possibility of a “de-anchoring” of inflation expectations is a clear signal of growing concern within the ECB. European equity markets posted strong gains yesterday on the back of growing expectations of more aggressive monetary easing by the ECB.”
“Data released yesterday by the ECB will only reinforce these ECB concerns. Quarterly data on negotiated wage rates revealed an annual increase of just 1.6% in Q3, up from 1.5% in Q2 and 1.4% in Q1, which was a record low. The average rate for this calendar year looks like it is heading for the lowest on record. The euro-zone unemployment rate has started to drift lower but at a painfully slow rate. Crucially, the ECB assumes that slow pace of improvement is set to continue – the ECB expects the unemployment rate to average 10.6% next year and 10.1% in 2017. The current rate is 10.8%.”
“Wages are one of the crucial components of lifting underlying inflation pressures – something we believe is beginning to play out in the US and will soon follow in the UK. However, the frustration for ECB officials is that government action on reforming labour markets has been slow and hence the heavy lifting to limit downside inflation risks is left in the hands of the ECB. That will be abundantly clear on 3rd December with an obvious offset to weak wages over the short-term being a weaker euro.”