ECB Watch: from Frankfurt with Doom & Gloom

Summary  

• As per recent ECB-speak, an October rate cut is assured following the very weak September Eurozone PMI, which triggered a barrage of dovish ECB-speak not from the usual suspects. Even hawks like Bundesbank President Nagel are clamoring for a cut next week. Furthermore, expect another cut in December before a pause in January 2025. A three percent deposit rate has been the line in the sand for several ECB-speakers;
• I have penciled in a run-of-the-mill easing cycle of another 100bps in front-loaded rate cuts next year. Both past precedent regarding Euro Area inflation and current inflation developments in the US suggest that Euro Area services inflation will come down to levels that are consistent with two percent inflation. Services inflation having finally normalized will allow the ECB to set rates in accordance with the stagnation that is afflicting the Euro Area economy;
• The risks are tilted toward a more aggressive ECB easing cycle, which will include one or more 50bps cuts. I am still a recessionista with regards to the US economy. A further US labor market slowdown will trigger an aggressive response from the Fed. The ECB will be forced to follow suit;
• I start this note with a discussion of a recent speech by Board Member Isabel Schnabel. Even though the presentation didn’t contain anything new, the market picked up Schnabel’s negative assessment of current economic conditions. That negative assessment resulted in the dovish repricing of the October and December Governing Council meetings. However, the market and the commentariat missed Schnabel’s real and hidden message from her speech. Namely, that Euro Area productivity and real wages have become utterly stagnant. Without a recovery in productivity and real wages, the Euro Area is doomed to oblivion.