ECB struggles to salvage euro zone from deflation, while the Fed sees US economy recovering
As the ECB is to announce a new attempt to steer the euro zone away from deflation, US jobs data to be released on Friday are expected to show the US economy is recovering, and the time has come for the Fed to suspend its bond-purchasing stimulus.
The European Central Bank is expected to announce on Thursday its new attempt to salvage the course of the euro zone away from deflation, after the latest data on consumer price pressures. On Friday, data on US jobs are expected to confirm the country’s economy is recovering fast, and the point has been reached for the Fed to stop its bond-purchasing program. The contrast between the euro zone economy and its US counterpart has deepened to a stark level and has added to the pressure on the ECB and on European leaders to take measures for boosting growth.
Last week, Jack Lew, US Treasury Secretary, underlined Washington’s frustration over the EU governments’ unwillingness to increase public spending. The risk of the euro zone slumping into deflation and deep stagnation is one of the drags on the global economy, together with a massive slowdown in China and the conflicts in the Middle East.
What is needed more as a boost for the euro zone is ECB’s action rather than European governments’ fiscal measures. The central bank surprised markets with a rate cut at its September meeting, urging banks to get cheap loans and thus stimulate lending. Now on Thursday, the ECB is expected to release details on its roadmap for purchasing repackaged loans and thus unblocking corporate credit.
The size of the program under which ECB is to purchase asset-backed securities and covered bonds can give clues on the timing for the central bank’s purchases of government bonds: a mightier, though more controversial, stimulus form. It is estimated that the more massive the program, the longer the period during which the European Central Bank can be expected to refrain from purchasing government bonds.
Mario Draghi has stated the bank is aiming at scaling back its balance sheet to early 2012 levels, about 3 trillion euros, against the current 2 trillion euros.
Consumer price data to come out on Tuesday is expected to underline once again where the euro zone inflation is headed to. For September, inflation in the euro area is expected to decline to 0.3 percent, the lowest in almost five years.
In the US the focus is in a different direction: the time when interest rates will start rising, after hovering near zero for almost six years. For this year, US economy growth of 2 to 2.5 percent is expected, and the Fed plans to suspend its bond-purchasing program in October.
The nonfarm payrolls due on Friday are forecasted to show a rise t0 219,000 people hired in September, compared to the surprise slump to 142,000 in August. Other indicators keenly awaited by the Fed and investors alike are consumer spending, trade and manufacturing.
But wage growth has not been much in line with the soaring in employment growth, as Fed Chair Janet Yellen pointed, and that could delay the first rate hike. The latter is increasingly reliable as an indicator of the extent of economy slack. Earnings growth has been lagging behind inflation in the US, the euro zone, also in Britain and Japan, during the second quarter. That is why it is expected central banks would not be in a hurry to raise record-low interest rates.
