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June 28, 2019

News in Charts: Draghi takes dovish tone despite uptick in sentiment

by Fathom Consulting.

Fathom’s Economic Sentiment Indicators (ESIs) distill numerous measures of economic confidence into a single composite indicator for each economy. In May, the euro area ESI rose to 0.5%, up from 0.3% in the previous month, although the indicator remains some way below the levels we saw through 2017 and the early part of last year.

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Encouragingly, the ESIs for the currency bloc’s four largest economies all firmed last month; the indicator for Italy rose 0.3 percentage points and climbed out of negative territory for the first time since January.

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Euro area GDP growth rebounded to 0.4% in the first quarter of this year and, while the currency bloc may struggle to maintain this rate for the remainder of the year, there are signs that growth has stabilised, and that the expansion is likely to continue.

Nevertheless, core inflation remains weak and continues to hover around 1%. This weakness looks to have pushed the ECB towards action and in a dovish speech last week, the central bank’s President Mario Draghi signalled a potential change in policy stance. While previous forward guidance had suggested that the central bank would act if the outlook deteriorated, Mr Draghi stressed a need to act unless inflation rises. Following his remarks, bond yields fell across the currency bloc, with ten-year French government bond yields now flirting with negative territory.

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Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in Eikon.

While rising wages and tight labour markets suggest that underlying inflation will eventually firm, it is likely to remain substantially below target in the near term and Fathom now expects the central bank to act sooner rather than later.

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If the central bank does to choose to ease, then it retains a number of options ranging from pushing out the expected timeline for future rate hikes, to cutting the deposit rate further, or even bolder moves such as restarting asset purchases or cutting the main refinancing and marginal lending rates.

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The charts in this article have been created using Chartbook on Datastream. The Chartbook was initially created by Fathom Consulting in 2012 and is now a catalogue of approximately 9000 charts, covering over 170 countries, analysing up-to-date macro and financial data. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. The Composite FVI, comprised of readings from all four underlying FVIs, is available for 176 countries in the Fathom Proprietary Indices section of Chartbook. To access Chartbook via Datastream search ‘cbook’.

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Datastream

Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.

Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.

 

 

 

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