A week after the ECB meeting where the rates remained unchanged, ECB Vice President Constancio is going to hold a speech in Frankfurt. It is worth betting that most of the discussion will be around the Eurozone inflation and in particular the ECB difficulties to boost consumer prices.
Early September, Constancio already mentioned that the lack of inflation is set to persist in particular due to economic difficulties of the United States and geopolitical risks that should weigh on the global economic conditions. One could also say that massive QE does not have the expected results.
Most of the European government bonds in the front end of the yield curve are now trading a negative interest rate and it has been a while since investors are trading bonds for capital appreciation rather than yields because of free money. All of that is underpinning low inflation. Markets expect normalisation and higher asset yields but when the ECB removes it stimulus, good chances are that it could trigger massive losses in different asset classes.
Rumours are that the ECB said should be ready, at the next meeting late October, to reduce their massive asset purchase program from 60 billion euros a month to 20 or 40 billion euros a month. Markets are still largely bullish on the euro even though we do believe that markets are overly optimistic regarding the European Central Bank, for now.
By Yann Quelenn