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Fed and BOJ Showed The Impact of Rate Divergence Last Week

After the Federal Reserve wound up its bond-buying programme, as expected, and the Bank of Japan sprung a surprise by sharply increasing the pace of its money-printing, this week the European Central Bank takes its monthly bow and will probably come up with nothing new.

Over the past week there have been some glimmers of hope for the euro zone. European bank stress tests came up with a largely clean bill of health, though whether the demand is there for more credit remains to be seen.
Inflation edged up for the first time in many months. It might have only gone from 0.3 percent to 0.4 but that was against a backdrop of tumbling energy prices which could have pushed the headline figure yet lower.
Much of the evaporation of business confidence has been due to events in and around Ukraine and now a deal, brokered by the European Union, has been struck whereby Moscow will resume supplies of gas to its neighbour over the winter in return for payments funded in part by Kiev’s Western creditors. That eases concerns that a new “gas war” could disrupt winter supplies of energy to EU states.
But these are skeletal green shoots. Today, manufacturing PMI surveys across the euro zone are expected to show factory activity is barely growing but there is little prospect of the ECB adding to its arsenal of measures until a second round of cheap loans to banks – given on the basis that they lend on into the economy – are offered in December.
Take-up at the first round in September was poor but that was before the stress tests were complete.
There is a good chance that the “TLTRO”, together with purchases of bundled-up asset backed securities (starting later this month) and covered bonds (which have begun with a whimper), won’t prove sufficient to jolt the euro economy into life.

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