Article / 29 May 2017 at 5:11 GMT

3 Numbers: Looking for early signs of ECB tightening in money supply

editor/analyst /
United States
  • Will Eurozone money supply report show signs of monetary policy tightening?
  • A bullish outlook for EURUSD is still reasonable
  • The US 2-year yield is in a holding pattern, raising doubts of a June rate hike

By James Picerno

Monday’s a quiet day for economic news, in part because the US market is closed for the Memorial Day holiday. The main event for macro reports in Europe is the monthly update of money supply data for April. 

Meanwhile, keep an eye on EURUSD, which ended last week near an eight-month high. Although US trading is having a hiatus today, traders will be studying the chart of the meandering 2-year Treasury yield for clues on the outlook for next month’s Federal Reserve meeting.

Seeking a sign ... today's Eurozone money supply report will be closely read for
any indications of monetary policy tightening. Photo: Shutterstock

Eurozone: Money Supply (0800 GMT) Economic growth in the second quarter is expected to tick higher, building on a firmer trend that’s been underway since mid-2016. The question is whether the upbeat outlook will soon convince the European Central Bank to start winding down its extraordinary loose monetary policy?

Friday’s revised estimate for Q2 GDP growth suggests that the ECB will be under growing pressure to begin squeezing monetary policy, if only on the margins. projects that economic output will increase 0.76% in the April-through-June period, up from 0.5% in Q1.

Survey data also paints a bullish profile. “The PMI data indicate that Eurozone growth remained impressively strong in May,” said the chief business economist at IHS Markit last week. “Business activity is expanding at its fastest rate for six years so far in the second quarter, consistent with 0.6% to 0.7% GDP growth.”

Today’s monthly report on monetary aggregates will be closely read for any signs that the ECB is tweaking its policy stance.’s consensus forecast sees a slight dip in the broad measure of money supply (M3): a 5.2% year-on-year rate for April, down fractionally from March’s 5.3%, but that's still close to the fastest pace in nearly a decade.

If there’s an early clue that policy is adjusting, a change may be clearer in the narrow measure of money (M1). Although there’s no forecast for M1, there’s a reasonable chance that we’ll see the elevated 9.1% year-on-year change through March ease in the April print. There’s still a long road ahead to normalise ECB policy, but a hint of things to come may appear in today’s M1 data.

EURUSD Stronger economic growth in the Eurozone is a key factor for the strength of the euro this year. With economists still looking for the recovery to hold on to recent gains if not accelerate, a bullish outlook for EURUSD is still reasonable.

On Friday, the euro was changing hands at roughly $1.118, or close to the highest level since October. For the moment, the trend has technical and fundamental support. “There is a positive momentum on flows, with more hedge funds joining the euro trade,” said the head of G-10 currency strategy at Bank of America Merrill Lynch last week.

One reason for thinking there’s still more upside left: EURUSD’s 50-day moving average last week ticked above the 200-day average for the first time in eight weeks, based on daily data. That alone is no guarantee that the euro will continue to climb, but it’s another signal that upside momentum remains intact.

Lingering questions about the Trump administration and whether its pro-growth legislative agenda is still alive are providing a tailwind for EURUSD, too. The sceptical reaction to the White House’s release last week of its first federal budget isn’t helping. 

Love it or hate, Congress isn’t likely to take the administration’s proposals seriously. That’s not unprecedented – budget proposals from the White House are typically labeled DOA – dead on arrival. Nonetheless, to the extent that the White House was hoping that its budget would spur new momentum for legislative influence, the proposal looks like a dud.

What might derail the euro’s rise? An unusually strong run of economic news for the US, or the opposite for the Eurozone, are on the short list. But for the near term, neither of those scenarios looks likely.

US: 2-Year Treasury Yield The crowd is still expecting that the Federal Reserve will raise interest rates again next week. Some analysts think that the stock market is drawing strength from that forecast. The assumption is that if the central bank is willing to squeeze policy, that’s a sign that economic growth will stabilise at a moderate pace and perhaps even accelerate. But from the vantage of the benchmark 2-year Treasury yield, there’s still plenty of doubt about June’s policy decision.

This widely followed maturity, which is considered the most sensitive spot on the yield curve for rate expectations, was largely unchanged last week, holding at 1.30% for a second day in a row on Friday, based on daily data via For the past two months, in fact, the 2-year rate has been trading in a narrow range amid mixed economic news.

Meanwhile, Fed funds futures are pricing in an 83% probability that the Fed will lift rates at next month’s policy meeting, based on CME data as of May 27.

Why aren't yields rising in sympathy with elevated futures expectations? Softer-than-expected inflation data for March and April may be a factor. If pricing pressure is tame, the Fed still has the luxury to delay the next rate hike.

Friday’s news that new orders for durable goods orders in April fell for the first time in five months added to the sense that economic growth will remain moderate, in line with recent history. Note, however, that the third month in a row of essentially flat performance for business investment (durable goods ex-defense and aircraft) is worrisome. This slice of the data is a benchmark for judging confidence in the economic outlook, and for the moment corporate America seems inclined to take a wait-and-see attitude.

The Treasury market is in a similar mood. Although there’s no sign of recession on the horizon at the moment, the case for expecting growth to pick up remains debatable.

“We’re still on track for a 2% growth economy, give or take a little, but not a 3% economy,” according to Diane Swonk, an independent economist in Chicago.

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– Edited by Gayle Bryant

James Picerno is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.


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