EUR: the economy is still not convincing enough

Summary

EU and Eurozone macro data is showing improving economic activity. Lavour market is still lagging. There are some bad readings in the last few months such as trade balance and German factory orders. This underpins well the ECB wait and see stance.

Central Bank and rates

ECB holds main rate at 0.00%, deposit facility at -0.40%

QE, EUR 2.3 trillion bond buying programme to continue until at least end of 2017
Level of QE to drop from €80bn to €60bn per month.

There some pressure from Germany for a "timely start to the exit” from loose monetary policy. "German politicians, facing national elections in September, are concerned that a toxic combination of low interest rates and rising inflation will squeeze the nation’s conservative savers, and drive voters into the arms of antieuro parties.

After a sharp reversal two weeks ago, the German 2-Y yields are at 0.70% again.

Peripheral riskwise the Italian bond spreads are important to watch. The 10-Y spread is at 2.10%. This is not a particularly high figure given that US premium is at the same level.

Economic Activity

The economy is expanding modestly. There is slight increase in the speed of growth.

Unexpected drop in trade balance.

 ZEW Economic Sentiment is modest but catching up.

Unexpected drop in German Factory orders.

Inflation

The steep uptrend in inflation is intact. 

Labor Market
The unemployment is trending down, but still far from the pre-crisis level. 

Consumer
The last two readings of Retail sales was not in line with the uptrend.

European consumer seems to be confident.