Scoring Europe: Economic Turbulence Stalls Rate Hikes

  • Thursday, October 15, 2015

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Europe is in doubt.

The British economy–rapidly growing in the first half of the year–has put on the brakes in Q3, a downturn in market performance that justifies the Bank of England’s (BOE) decision to hold off on a rate hike. As demonstrated by our algorithm’s analysis of BOE communications, the central bank’s mood (BOE Index) peaked in early summer and has been steadily dropping to a modestly hawkish average score of 0.58 over the past week. Interestingly, the BOE’s August declines anticipated–in excess of a week–similar developments in the British market (as represented by FTSE 100):

ftse_boe_2015

Still firmly in positive territory, the BOE could still raise rates this year, but, given the direction of their trend, Prattle expects that we won’t see a liftoff until 2016.

The situation in the eurozone strikingly similar. The mood of the European Central Bank (ECB Index) also reached a localized peak in June only to see a steady decline and a slight rebound in September. Also, as with the BOE Index, the ECB’s sentiment clearly anticipates market fluctuations–particularly evident in the late June-October stretch:

eurzone_ecb_2015

The big differences between these largely parallel developments?

1. The ECB’s peak (~0.6) was much lower than BOE’s (1.0).

2. The ECB has continued modest economic stimulus.

Presently, the ECB weekly average sits at a fairly neutral 0.12. While mildly hawkish, this level of sentiment is simply not strong enough to indicate an imminent policy change. Concerns over continuing growth struggles appear too persistent to warrant a hike.

Bottom line: We don’t expect big policy changes out of Europe any time soon.

The Prattle Team,
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Every week the Prattle team will be publishing its take on a global central bank region. There are 4 regions–European, North American, South American, and Asian–and banks from these regions will be scored based on our analysis of central bank communications in that bank over the past week. Indicating the “hawkishness” or “dovishness” of the bank, the scores will be given in numbers ranging from -2 to +2 where -2 is extremely dovish and +2 is extremely hawkish.

For more precise scoring on individual banks, speakers, and communications, you can reach out to Prattle on our contact page or through this link.