Expect an extension of QE in 2018 despite a stronger economic momentum

Economic momentum remains positive, pointing to an acceleration after the publication of strong real GDP data (which rose +0.6% in the first quarter) and an acceleration in manufacturing PMI.

Regarding the latter, we note a broad-based improvement in the various sub-indices: backlogs of orders rise, and current production remains solid. The recent appreciation in the EUR/USD exchange rate is likely to weigh on the leading indicator as Eurozone exports are significant. Nevertheless, the June PMIs clearly point to a further expansion during the second quarter. On inflation, latest data were mixed given the deceleration in headline HICP (at 1.3%), due to lower energy price, while core inflation beat expectations thanks to a higher positive contribution from services. We still consider that inflation is neither self-sustained nor durable in the medium term. Recent comments from ECB’s Draghi pointed to a continuing low inflation rate and reflationary forces, the latter having supported an overreaction from sovereign bonds markets. Overall, we still expect an extension of the ECB asset purchase program in 2018 to be announced as early as September.

Gero Jung – Chief Economist – Mirabaud AM