The ECB reiterated its dovish stance as growth risks remain on the downside, opening the door for NIRP mitigating measures
The IMF downgraded its global GDP growth forecast for 2019, by 0.2 pps compared with January (-0.6 pps compared with July 2018), to 3.3% yoy, versus 3.6% in 2018. Sequentially, the IMF’s baseline forecast is for a pick-up in momentum in H2:19 and 2020 (3.6% yoy), due to the shift from all major central banks to a more accommodative stance and an improved outlook for US-China trade tensions. Nevertheless, the IMF continues to see risks tilted to the downside, including, inter alia, a possible resumption of trade tensions and a no-deal Brexit.
Regarding the ECB meeting, more clarity on economic momentum and risks will be needed before the Bank considers any further changes to forward guidance and measures to mitigate side effects of negative interest rates on banks (e.g. tiered rate system on banks’ excess reserves, more favorable TLTRO terms). More details on the new TLTROs will be provided at a future meeting, likely June when the ECB staff’s updated economic forecasts will be released. Note that euro area bank lending data improved in February, with loans to the private sector up by 3.2% yoy. Moreover, according to the bank Lending Survey for Q1:19: credit standards to corporates remained in a slightly easing mode, against banks’ expectations for a modest tightening at the time of the previous survey (mid-January). On the negative side, loan demand was slightly weaker.
Regarding Brexit, the EU Summit provided an extension to Article 50 to October 31st. If the Withdrawal Agreement (WA) is ratified by both the UK and the EU before October 31st, the withdrawal will take place on the first day of the following month. In the event this happens by May 22nd, the UK will not need to participate in the European Parliament elections. If the WA is not ratified by May 22nd, the UK is obliged to hold these elections, otherwise a no-deal Brexit will occur on 1 June 2019. Any changes to the WA were ruled out, but the accompanying Political Declaration on the future relationship is open for amendments. Concrete political developments in the UK now appear less likely before the end of the Easter holiday (thus post April 22nd).
Regarding equity markets, the corporate earnings season started last week, with JPM ($2.65 vs $2.35) and Wells Fargo ($1.20 vs $1.11) reporting better-than-expected earnings for Q1:19. Overall, out of the 29 companies that have reported so far, 83% have exceeded consensus estimates. However, consensus remains moderate regarding Q1 overall, expecting a decline of 4.3% yoy vs circa +13% yoy in Q4:18. The situation is expected to improve during the remainder of 2019, in line with fundamentals (+3.5% vs 20% in 2018).
Key catalysts going forward will be Chinese Q1:2019 GDP -- due on April 17th. Against the backdrop of the latest positive data (credit, trade) and diminishing trade risks, consensus expects a 6.3% yoy outcome in Q1:2019 compared with 6.4% in Q4:2018. For the whole year, the IMF has upgraded its 2019 estimates for Chinese growth to 6.3% (+0.1 pp) vs 6.6% in 2018.