Global Weekly Commentary: ECB - keeping up the pace
Key points
The ECB in focus
We expect the European Central Bank (ECB) to maintain its current pace of asset purchases even though the economic restart is gaining moment.
Market backdrop
U.S. nonfarm payrolls growth picked up in May. We caution against extrapolating too much from erratic near-term data amid a powerful restart.
Data watch
U.S. inflation data will also be in focus this week. A high core consumer price index (CPI) reading could fuel talks of tapering by the Federal Reserve.
We expect the ECB to maintain its current pace of asset purchases even as the economic restart gains traction. We wouldn’t view a decision to slow purchases as a hawkish policy signal, as the ECB is focused on keeping financing conditions easy. This, and a Federal Reserve that we see keeping policy easy, provides a positive backdrop for risk assets including European equities, in our view.
Chart of the week
Actual and projected euro area and U.S. inflation, 2006-2023
Sources: BlackRock Investment Institute, the Federal Reserve Board and Bureau of Economic Analysis, with data from Refinitiv, June 2021. Notes: The orange dots represent consensus expectations for ECB staff inflation projections due this month. Fed projections refer to the Fed’s Summary of Economic Projections from March 2021. Euro area headline inflation refers to the Harmonized Index of Consumer Prices (HICP). U.S. core PCE inflation refers to the personal consumption expenditures price index, excluding food and energy.
Financing conditions in the euro area tightened late last year and in the first quarter of 2021, but have since stabilized and still appear supportive of growth. Yet the region’s inflation outlook – the primary consideration in the ECB’s policy decisions – remains weak. Consensus expectations see ECB staff projections due this week showing 2023 inflation still materially undershooting the bank’s target of below but close to 2%. In contrast, the U.S. core personal consumption expenditures (PCE) inflation – the Fed’s preferred inflation measure – has shot up above the 2% target. It will likely hover at or just above target over the next two years, according to the Fed’s latest Summary of Economic Projections. See the chart above. This underpins our expectation for the ECB’s policy support to stay put – regardless of its decision on the pace of asset purchases this week. In addition, we caution against reading too much into strong near-term growth data. We are experiencing an economic restart rather than a typical business cycle recovery; the usual business cycle playbook doesn’t apply, in our view.
We expect the ECB to maintain its current pace of asset purchases under the pandemic emergency purchase program (PEPP) this week, despite a likely upgrade to its growth projections. The central bank is squarely focused on maintaining easy financing conditions. An unwarranted tightening in financing conditions, partly as a result of rising U.S. bond yields earlier in the year, prompted the ECB to quicken the pace of its asset purchases in March. Since then, the euro area has been catching up on activity restart, amid still supportive financing conditions.
Even if the ECB were to reduce its pace of asset purchases, we would view this as an operational decision rather than a policy decision. The ECB has committed to maintain its policy support for the duration of the pandemic crisis – at least until early 2022. Beyond that, we expect policy support to remain in place given an outlook that points to inflation staying far below target, with further asset purchases likely conducted through the extension of other asset purchase programs.
We see both the Fed and ECB likely upholding their accommodative policy stances. Inflation – not the near-term growth outlook – is key to the Fed’s rate outlook under its new policy framework, in our view. The strong activity restart in the U.S. has led to unusual supply and demand dynamics, and volatile near-term growth and inflation data. Long-term U.S. government bond yields have risen this year, but the rise has been more muted than typically seen in response to rising inflation and growth expectations in the past – in line with our new nominal investment theme that sees a lower future path of short-term interest rates than markets are pricing in even amid rising inflation. We don’t see the Fed discussing a tapering of asset purchases imminently – and a discussion later this year doesn’t mean a liftoff from near-zero policy rates is close, in our view. The case for tapering – or monetary policy normalization – in the euro area is even weaker, in our view.
The bottom line: We see the ECB’s commitment to accommodative policy as supporting our pro-risk stance over the tactical horizon as the reopening broadens out. We upgraded our tactical view on European equities to neutral in February, and are seeing more reasons to be optimistic about this asset class for the next six to 12 months. Yet we see a risk that markets could misinterpret an operational decision to slow the pace of purchases as a more hawkish view on policy stimulus, and we would view any spread widening in euro area peripheral bonds in such an event as a buying opportunity.
© 2021 BlackRock, Inc. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of June 7, 2021, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Asset allocation and diversification does not guarantee investment returns and does not eliminate the risk of loss.
In the U.S. and Canada, this material is intended for public distribution. In EMEA Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. From 31 December 2020, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Union, the issuer of this material is:(i) BlackRock Investment Management (UK) Limited for all outside of the European Union; and(ii) BlackRock (Netherlands) B.V. for in the European Union, BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In Switzerland, this document is marketing material. This document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. In the Kingdom of Saudi Arabia this information is only directed to Exempt Persons, Authorized Persons or Investment Institutions, as defined in the relevant implementing regulations issued by the Capital Markets Authority (CMA). In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, for institutional investors and financial intermediaries only (not for public distribution). No securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
© 2021 BlackRock, Inc. All Rights Reserved. BLACKROCK, iSHARES and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
BIIM0621U/M-1675706