08 July 2003

EZA 546 - ECB-Monetary

ECB conferences to illuminate new strategy, deflation stress
The rally in European equity markets in the last few weeks, accompanied by the retrenchment of 10yr Bund yields back toward 4% means there is no chance that the European Central Bank Council will countenance any change in policy this Thursday. Clients should focus on two things: any shift in tone in ECB President Wim Duisenberg’s news conference introductory statement and also, in particular, any new interpretation of strategy from Friday’s ECB Watchers Conference in Frankfurt, an annual event that we are due to attend. The most significant element of the staff macro-economic forecasts last month was the very low base to the range of euro area HICP in 2004 vs 2003. The fact the ECB projects inflation possibly falling as low as 0.7% y/y next year vs a base of only 1.8% this year – even while seeing not dissimilar highs of 1.9% or 2.2% respectively – shows that its bias was indeed toward deflation at the time of the June 5 cut of 50bp to a historical 2% leading-rate low. In reality, the ECB’s recent analysis had been more pessimistic; it projected euro/dollar to rise further from 1.16, and euro corporates to continue layoffs.

SummaryAsset Conclusions: Subdued inflation outlook implies ECB deflation concerns to hold for a while, limited upside to yields perhaps to a ‘normal’4.30% in 10yr Bunds

Contents
.

Figures
.

© Graham Bishop