“The major development in yesterday’s European Central Bank policy meeting was a significant downgrade to the ECB’s staff projections for GDP growth and inflation in the euro area over the course of 2013.
Since the ECB introduced it’s “Outright Monetary Transactions” (OMT) bond market intervention program in August, market volatility has been almost completely muted, and sovereign bond yields have fallen steadily throughout the course of the second half of the year. Concurrently, European stocks have been on a tear.
These two developments have put the euro crisis conversation squarely in the growth arena. The common line is that the ECB’s OMT pledge has sufficiently removed tail risks from financial markets for the foreseeable future. This, then, should allow policymakers to focus their full attention on measures aimed at reviving economic growth in the euro area.
Pursuant to this worldview, most strategists are calling for even higher stocks and even lower yields in the eurozone in 2013 as current trends continue and the currency bloc “muddles through” a mild recession.
In his 2013 outlook, titled In Authorities We (have to) Trust, Deutsche Bank credit strategist Jim Reid highlights a small problem with that narrative: the growth crisis and the market crisis are inextricably linked, and the ECB has actually done little to change that.
In fact, Reid argues that disappointing economic data – the one thing seemingly out of the ECB’s control – are what have driven the last two major selloffs in European markets:..”
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