More pressure on the ECB

The IMF continues its battle with eurozone in what was described by the Telegraph as a "blistering attack" on Europe's authorities for not doing more to stimulate the economy. The IMF points to a persistent failure to meet inflation targets, which could ultimately undermine central bank's credibility. They make the point that an external shock could tip the economy into deflation and they are concerned that this will increase the debt burden as the economy falters.

In one way this report could have implications for the IMF regarding its ongoing relationship with the ECB. It is worth remembering the Greek bailout was constructed from a combination of the ECB, the IMF and the European Commission, this body is otherwise known as the Troika. Suppose the situation in Portugal, for example deteriorated, what would the IMF's position be towards offering funds if it believed part of the problem was self-inflicted? Would they be less inclined to help? Could they dictate terms to the ECB before they would help? We do not believe that it will come to this, the ECB is well aware of the issues, but it would not be good for confidence if this report did raise tensions between the two bodies.

There may be an alternative motive; it is no secret that Germany in particular worries about the inflationary implications of too loose monetary policy. Could the IMF be trying to help bolster the ECB’s position to introduce outright quantitative easing? By publicly questioning the ECB's actions it may strengthen Mario Draghi and his fellow members hand with those who are anti more monetary measures. In Strasbourg last night Mario Draghi, as we speculated, reiterated that he sees risks to the downside for the economy and that QE is in the mandate. The IMF may be trying to offer him the excuse he needs.

After Monday’s surprise beat by Citi, on Tuesday Goldman Sachs and JP Morgan both beat analyst expectations with their results. There is an old saying that goes as well in life as it does the financial markets, under promise and over deliver. This appears to be what the U.S. banks are currently doing. Expectations for U.S. banks were pretty moderate at the start of the week, making it easier to beat them, which so far they appear to be doing.

Tuesday saw a surprise jump in the UK annual inflation rate to 1.9%, as Mark Carney sat before a select committee. The questions were again much as we anticipated around growth, interest rates and the strength of the housing market. One question that did appear to come from left field was from Labour MP George Muddie. He held up a book called Dark Pools. The book details the systemic risks that high frequency trading could cause the financial system. Probably to everyone's relief Mark Carney suggested that question was better directed to the FCA on another day.

Posted on July 16, 2014 .