A Contracting IFO Weighs on European Shares

European stock markets are mixed, as yields begin to move higher. The FTSE 100 is up on the day, while the DAX dipped on a weaker than expected Ifo reading and as the EUR is once again above 1.18 against the USD. Comments from ECB officials meanwhile continue to show growing pressure on Draghi to shift to a more hawkish guidance on the policy outlook.  The ECB’s Weidmann continues to call for a quick end to QE, which is a growing call within the central bank.

ECB’s Weidmann repeats call for quick end to asset purchases.

The Bundesbank President said Monday that domestic price pressures should strengthen as wage growth improves, adding that the ECB is “therefore on track toward our definition of price stability” and that against that background a “faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable”. Not a real surprise from the ECB hawk, but another confirmation that the ECB council is increasingly split on the policy outlook as the economy continues to improve.

ECB’s Hansson calls for gradualism in ECB policy chances. Hansson said the Eurozone economy may have reached a point where output gap is closing and 4Q could be a particularly strong quarter. More growth optimism from the ECB, but with Draghi remaining focused on still low inflation, that doesn’t change the still relatively dovish stance as net asset purchases will continue next year, albeit at a slower pace. Still, Hansson also stressed that gradualism is important when adjusting policy or communication, hinting that there may be a shift in communication in H1 next year, while advocating a move to a communication policy that draws attention to multi-faceted aspect of monetary policy.

German Ifo index fell back to 117.2 in December from 117.6 in November. The current conditions indicator still improved, but the expectations index fell back to 109.5, thus cancelling out the sharp jump in November, which always looked somewhat suspicious. The December reading is still slightly above the October number, leaving November looking even more like an outlier. The diffusion index showed manufacturing and wholesale trade readings falling slightly, while construction and retail sentiment improved. Overall a disappointment, but the headline number still remains near record highs and continued to improve in the fourth quarter of the year, backing expectations for a much stronger 2018 growth reading than initially anticipated although with spare capacity eroding fast, growth is expected to level off next year and the weaker December number will play into the hands of Draghi’s relatively dovish stance, especially amid low Eurozone inflation and wages growth.

Eurozone construction output dropped -0.4% month over month in October, bringing the annual rate down to 2.0% year over year from 3.1% year over year in the previous month. The number is coming on the heels of the weaker than expected German Ifo reading it is adding to arguments against an overly optimistic growth environment.