Euro: ECB patience with inflation and growth tension – BNY

Geoff Yu at BNY notes that Europe is seeking a Goldilocks mix of improving activity without reigniting inflation, with Euro strength already tightening conditions. The ECB is seen as having room to wait, while upcoming French, Spanish and German data will test inflation relief and growth, sharpening internal Governing Council divisions on how hot the Eurozone should run.

ECB waits as recovery builds

"Inflation remains the core issue in Europe. Activity is improving, but tightening too early would be a mistake. The European Central Bank’s (ECB) latest inflation survey shows expectations are anchoring more firmly, while the euro is near cyclical highs and already doing some of the tightening."

"Europe wants growth without reigniting inflation. Preliminary August PMIs point to a tentative “Goldilocks” mix: manufacturing intentions are improving, while services remain in moderate contraction, and the ECB’s latest inflation expectations survey shows easing. The ECB is right to stay vigilant, but it should not move too soon."

"Europe’s week centers on inflation relief. French and Spanish flash CPI on Friday are the main releases, with Spain still running much hotter than France. German unemployment data on Friday provides a labor-market read for the Eurozone’s largest economy."

"The complication is growth. Activity is turning higher. Recent PMIs show demand improving as supply pressures ease."

"Germany matters this week. Germany’s Ifo Business Climate on Tuesday is the other key test. July’s improvement was unequivocal, with companies becoming less pessimistic despite uncertainty in the Persian Gulf."