Yesterday, in “Thoughts On The ECB Minutes And A Bearish Euro Call For EURUSD Bulls“, I spent far more time than I should have talking about the conundrum facing the ECB now that the data appears to be rolling over just six months ahead of the sell-by date for APP.
The problem here is that they’re now trying to move further down the road to normalization at a time when the econ is coming in unexpectedly weak and just as trade jitters dent the outlook for global growth. Additionally, the notion that the Trump administration has adopted a weak dollar policy by proxy means that persistent euro strength could exacerbate any nascent weakness in the European economy and, perhaps more importantly, could imperil the slow progress towards the ECB’s inflation target.
The March minutes revealed an ECB that’s concerned about the market misreading the removal of the dovish slant on APP where “misreading” means traders thinking it’s an indication that the governing council is somehow hamstrung in their ability to ramp asset purchases back up should things get dicey. That concern was one reason why everyone interpreted the minutes as “dovish”.
Ok, so with that in mind (and because I’ve got a demonstrable penchant for talking about things that no one cares about on a Friday), BofAML is out with “3 reasons the ECB can’t get more hawkish” and they’re worth a quick skim.
The first is “too much debt” (incidentally, BofAML made this point in a note last week as well).
“Central banks have spent more than $10 trillion of QE-money over the past decade in an effort to reflate the global economy [and] in the process, they sparked a debt super-cycle,” BofAML’s Ioannis Angelakis writes, before observing that “while global debt has mounted to more than $160 trillion (government, household and non-financials corporate debt), global GDP is just above $60 trillion.”