The ECB has put itself between a rock and a hard place

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by Shaun Richards

It was only yesterday we were on the British side of the Channel and today we find ourselves travelling against the currently popular direction as we switch to La Manche. As we do so we see that the post meeting rumour and leak mill has started early this time around as I note these from @LiveSquawk.

ECB’s Vasle: Still Need `Highly Accommodative’ Monetary Policy New Waves Of Pandemic May Slow Recovery

So we start with a sort of steady as she goes from Slovenia but we also got this.

ECB’s Holzmann: See Potential Upside Inflation Risks – May Be Able To Normalize Policy Sooner Than Thought

So the Austrians are a little well more Austrian. The latter will have sent a bit of a chill down some spines and if we believe Die Welt one group affected has been Dax traders.

The initial weakness that was noticeable in the DAX this morning at the start of trading is now apparently being accelerated by this statement by Robert Holzmann. The Dax falls from 15,800 to currently 15,648 points.

A factor in this may well be that the Governor of the Slovenia central bank does not have a vote this time around.

Let us move on to the factors in play.


This is an awkward area before we even get to the current position. This is because the ECB has been more serious about inflation targeting than say the Bank of England. However it is also true that it has been unable to achieve its target for some years now in spite of applying negative interest-rates and via large amounts of QE bond buying negative bond yields too. So in its own terms it has tried and failed.

Now under President Lagarde it has made its mandate more inflation friendly suggesting it is keener on inflation exceeding 2% per annum than it was. But it did not mean this much.

Euro area annual inflation is expected to be 3.0% in August 2021, up from 2.2% in July according to a flash
estimate from Eurostat, the statistical office of the European Union.

As well as the issue of the big figure being 3 there was the fact that it was becoming broader as a trend.

followed by non-energy industrial goods (2.7%, compared with 0.7% in July), food, alcohol & tobacco (2.0%, compared with 1.6% in July)

So blaming it on energy was more difficult and of course anyone following this week’s news of surging energy prices might want to steer clear of that particular hot potato at this time.

CHART OF THE DAY: German 1-year forward electricity prices (a benchmark, particularly for big industrial consumers) has surged to a record high of >€91 per MWh, surpassing the peak set in 2008 during the commodities super-cycle ( @JavierBlas)

Looking ahead there are more signs of trouble on the horizon.

In July 2021, industrial producer prices rose by 2.3% in the euro area and by 2.2% in the EU, compared with June
2021, according to estimates from Eurostat, the statistical office of the European Union. In June 2021, prices
increased by 1.4% in the euro area and by 1.5% in the EU.

As you can see there is more on its way from this source and again it seems to be spreading to new areas as we look at the monthly breakdown.

 by 1.9% for intermediate goods, by 0.7% for durable consumer goods, by 0.5% for capital goods.

This brings us to the issue of inflation via supply shortages.

Nearly half of EU rubber, machinery and computer producers, and most electrical equipment makers, report supply shortages. Almost 60% of carmakers remain affected ( Financial Times )

Many businesses seem to be struggling with this in Europe.

A record one in three EU furniture makers say they have been affected by supply shortages, according to a quarterly survey by the European Commission. At a global level, high shipping costs and delivery delays because of bad weather and Covid-19 shutdowns in major Asian ports are big pinch points. Transport is a “nightmare” where even “a screw or small component from Asia can take three months”, said Temahome’s Moreau, who also heads France’s furniture trade body. “We had 16 containers being shipped to the US in June and July and they still hadn’t got through by August. Lead times to the US have doubled.”

The shipping issue continues and furniture includes lumber which has surged in price then dropped and in the last week has been rising again. The transport one is such that it reminds me of an old British Rail advertising line let the train take the strain.

Transport costs have soared. Between China and Europe, fees are nearly seven times higher than in August last year, according to data provider Freightos. To work round that problem, Ikea said it was diverting some supplies on to trains. “We will use rail transport from China to Europe to free up container capacity that we can use to ship more to US,” the company added.

The various Chinese built railway lines will no doubt be grateful for the business although railway lines are capacity constrained too. But anyway this issue is in play.

Others are struggling to meet demand. A DIHK survey of German businesses found 83 per cent reported price increases or delivery problems for raw materials, intermediate products and goods in August.

Economic Growth

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This is a story of two halves and let us start with the glass half full.

In the second quarter of 2021, seasonally adjusted GDP increased by 2.2% in the euro area and by 2.1% in the
EU compared with the previous quarter, according to an estimate published by Eurostat.

Some got a little high on this and were projecting the 16.3% growth in Greece as a triumph. Whilst it is welcome it still leaves it some 20% or so below pre credit crunch levels. But the theme is one of a better period of growth.

The problem comes as we bring things more up to date. Then worries of slowing growth abound. We have already looked at the supply issues. We can move onto the latest official data.

In July 2021, the seasonally adjusted volume of retail trade fell by 2.3% in the euro area and by 1.9% the EU,
compared with June 2021 ( Eurostat)

Also the construction sector seems to be struggling too.

“The downturn in the eurozone construction sector extended
into its second month in August, as businesses reported
a slightly quicker fall in activity.” ( Markit PMI)

That follows on from the official June data showing a monthly fall.

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Next comes the news of the tax rises in the UK yesterday. These will be contractionary in economic terms and thus a small impact on the Euro area but it has implications for policy there too.

At the end of the first quarter of 2021, still largely impacted by policy measures to mitigate the economic and social impact of the coronavirus pandemic and recovery measures, which continued to materialise in increased financing needs, the government debt to GDP ratio in the euro area exceeded 100% for the first time – the ratio stood at 100.5%, compared with 97.8% at the end of the fourth quarter of 2020 ( Eurostat)

In a way the apparent need to give such a long explanation is as revealing as the rise past 100%. Of course with debt yields wither low or negative there is not the immediate pressure of the past. But that was true of the UK and some countries have become more vulnerable as the ECB has replaced overseas bond holders in Greece and Italy.


We do have a live meeting with the Stranglers as a theme tune.

I said something better change

I said something better change

I said something better change

I said something better change

The trouble is that for a while it seemed easy. The ECB could reduce its rate of PEPP purchases and claim to have done something and ironically it would have beaten the Federal Reserve to the taper trigger. As to whether it would make much difference is another matter as the purchases would remain large.

Now with signs of economic slowing on the rise the ECB now faces a two-way pull almost like the symbol of January. So I expect some sort of trim of the purchase rate to be announced. After all we have seen before that they can waffle around with the amounts anyway like when President Lagarde argued weekly numbers did not mean anything.

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