So, Mario Draghi did it again. Not only did he manage to get his own way and launch a surprisingly large asset purchase programme of around EUR1,100bn, overruling German opposition, but he also managed to make it as close to open-ended as he could without getting in trouble with the legal framework. He did this by saying that asset purchases ‘are intended to be carried out until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation...’ (see press release). This exceeded even our above-consensus estimate of asset purchases (for more details on the ECB measures see Draghi delivers: ECB’s bazooka in detail and market implications, 23 January).
With the ECB finally firing the bazooka, it is hard not to be bullish on euro risk assets. The main other component that affects performance of risk assets – growth momentum – is also turning clearly more positive in the euro area. We believe euro area growth will improve from here and have a clear above-consensus forecast for the euro economy this year of 1.5% (consensus 1.1%). We have seen yet more evidence of stronger growth coming in the past week. First, the German ZEW index showed another marked increase in January. Contrary to its reputation, it is actually a very good leading indicator. Also, the recent rise cannot be ascribed to strong equity markets as euro stocks fell from December to January. Hence, there is clearly a sentiment shift going on and the development in ZEW tends to be mirrored in German business confidence with a short lag (see chart). Thus, we expect another increase in next week’s ifo release for January. Second, euro composite PMI for January rose a bit more strongly than expected to 52.2 from 51.4. Third, euro consumer confidence rose more than expected in January to -8.5 (consensus -10.5) from -10.9 in December. Following a slight decline over most of 2014, consumer optimism has moved higher again over the past two months, probably boosted by the big decline in gasoline prices.
To add to the more positive picture one of the best leading indicators for euro area growth, real M1 growth, is also pointing to a clear acceleration in growth to around 2% in mid-2015. This should also be reflected in a rising path for euro PMI over the coming quarters (see chart). Rising PMI normally goes hand in hand with a positive environment for risk assets – not least stocks.
Apart from the positive indications in leading indicators, there are also fundamental factors leading us to believe the euro area will gain momentum. We see five drivers for stronger euro growth this year: (1) the negative effects of the Ukraine crisis that gave a hit to investments is fading, (2) the oil price decline is boosting private consumption, (3) the sharp depreciation of the euro gives a boost to exports and business confidence, (4) credit standards are being eased (as shown by data this week) and (5) the US economy is seeing the strongest growth in 10 years providing a good basis for exports.
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