Now it seems that we may have some better insight as to why European Central Bank official, Benoît Coeuré, is talking about front loading its quantitative easing (QE) program. It is because growth in the Eurozone is weakening.
The early onset of QE and QE expectations gave the Eurozone economy a much need boost, especially in Germany, the pillar of strength in the Eurozone economy. We saw the U.S. dollar soar and the euro fall, and that helped EU growth. Yet when weak data hit the United States and speculation that the ECB might not need as much QE, the euro mounted somewhat of a comeback. Now there are worries that the euro rebound may have taken its toll on European growth.
The report from the Markit Economics composite index of services and manufacturing seemed to justify those fears as it slipped to 53.4 from 53.9 in April and 54 in March missing market expectations. In Germany the drop was a more pronounced drop as it fell from 54.1 to 52.8. It seems that the rebound in the euro seemed to take a bigger toll on EU manufacturing growth and the ECB wants to take swift action to regain is weakening momentum.
China growth is slowing as well as a big trading partner with the EU. The preliminary Chinese Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 49.1 for May, missing the 49.3 level from a Bloomberg survey.
The other reason that the ECB may want to front load its QE program is because it is becoming more obvious that the Federal Reserve is also going to stand pat on rates longer than anticipated. In yesterday’s FOMC minutes the Fed likely took a June rate hike off of the table. What’s more the Fed seems to be increasingly worried about how the market is going to take its change in policy. It went as far as to show worry about the impact of high frequency trading (HFT) in the U.S. bond market.
They worry that the HFT are not adding liquidity but taking liquidity and creating false liquidity that could cause massive swings if the markets were going to suffer another ‘taper tantrum’. The bottom line is the Fed is still worried about growth and the lack of jobs and inflation and while they blame the dock strike in California and the weather there are some concerns that there could be something more ominous going on.
That brings us back to oil. Oil is caught between looking at what should be bullish after yesterday’s Energy Information Administration supply report that showed another drawdown in U.S. supply. The EIA said that U.S. commercial crude oil inventories decreased by 2.7 million barrels from the previous week. While the number was not as bullish as the American Petroleum Institute numbers, it still makes a bullish argument. I maintain my bullish stance as talk of more bankruptcies in the shale patch will keep a cap on U.S. output, even while bigger producers, produce more oil with less rigs.
Total motor gasoline inventories decreased by 2.8 million barrels last week, but are above the upper limit of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories decreased by 0.5 million barrels last week and are in the lower half of the average range for this time of year according to EIA.