With French President Emmanuel Macron and German Chancellor Angela Merkel visiting the White House this week, it seems like a good time to revisit the prospects of the European economy, and the European Central Bank (ECB) in particular. As my colleague Andy Kositkun pointed out in his “Week Ahead" commentary on Sunday, the European economy has been slowing down this year and worries about it are starting to accumulate.
What's happening? The strong euro has inflicted damage on Europe's export economy. The common European currency was up 14 percent year-over-year against the U.S. dollar before dropping off by 2 to 3 percent in recent weeks. This has hurt European exporters, although some hopeful manufacturing data from that sector was released this week
That brings me to this week's ECB meeting. It was the market highlight of the week, although as expected, the ECB kept its deposit rate at -0.4 percent and its quantitative easing program in place.
Looking ahead, the ECB has some critical decisions to make in the coming months. Sometime this summer, it is expected to announce plans to end its practice of quantitative easing (QE), mostly likely starting later this year. Recall that back in late 2013, the U.S. Federal Reserve started tapering QE and it was finished buying bonds by the end of 2014. The ECB is quite a bit behind the U.S. Fed in this regard.
And then there is that negative interest rate, which has been in place since mid-2014. Futures pricing and many analysts expect that rate to stay at -0.4 percent until mid-2019. In fact, it would seem that the rate will not come out of negative territory for another couple of years. In contrast, the Fed is expected to raise the federal funds rate to more than 2 percent by early 2019.
Looking at a longer economic time horizon, the U.S. 10-year yield hit 3 percent for the first time since 2014, while in Europe, most economies are well under 2 percent and some of the major economies – notably Germany – are under 1 percent.
My View: Europe's economy is doing fine overall and it clearly will continue to benefit from monetary stimulus. I consider what's happening right now a bit of an air pocket – not a reversal of growth.
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