Wednesday appeared a quiet day in the equity market as indexes paused for breath. The news that Christine Largarde, Managing Director of the IMF and appointed to replace the now discredited Dominique Strauss Kahn, was being formally investigated probably raised a few eyebrows. The investigation goes back to the days when Ms Lagarde held the post of Finance Minister during the period of Nicholas Sarkozy Presidency of France. According to the press, an investigation of this nature suggests that there is a possibility of prosecution at some stage, but in reality that could be years away if at all. The IMF, at what appeared to be a more unstable time in the global economy, moved seamlessly from one highly respected leader to another, and one assumes it could once again do so if needs be. So in that sense the muted reaction from investors is understandable.
Mario Draghi's Jackson Hole speech, intentionally or otherwise, has stoked up expectations that the ECB is on the cusp of introducing their own form of QE. Over the next two days economic data in the region will possibly either reinforce this view or may dampen expectations. On Thursday we get consumer confidence for the euro area region and on Friday we get employment and inflation data. Unlike the US consumer confidence report on Tuesday, Wednesday’s German and Italian consumer confidence reports came in below expectations, possibly giving us a small insight for what to expect from the region as a whole.
Despite Germany's finance minister stating on Wednesday his belief the market has over interpreted Mario Draghi's speech, potentially reigniting tensions with the euro area, our expectation remains that the October meeting will be the time for the ECB to act. Our suspicion is that the data over the next couple of days may also dampen expectations of this slightly.
It would be no surprise to see consumer confidence in the region dip on Thursday, but that alone is unlikely to spur the ECB into action. The same can probably be said of the industrial and economic sentiment indicators. Friday appears to be the big day when we get the release of inflation and employment data. Unemployment in the region remains unacceptably high, but has been gently falling over the past few months and so a further fall in figure on Friday cannot be ruled out. As for inflation, it unexpectedly fell to 0.4% last month and analysts have forecast to fall a little further to 0.3%. Over the past few months, the slowing of the decline in inflation, combined with the recent weakness in the euro, one wonders if Friday’s inflation figure may surprise, for a change, slightly on the upside.