Looking to the long-term
If we are to make any sense of what is going on we have to look at the fundamentals and try not to get wrapped up in the daily volatility across every asset class.
As we stated February, we felt the declines represented a market correction rather than a dramatic change to the underlying economy.
We try to make sense of companies and sectors by looking at the real drivers of their businesses, and ultimately their share prices, rather than second guessing what everybody else is doing.
Given this view it seems that Mario Draghi may be wasting his time trying to respond to short-term headline inflation data.
Over the last two years crude is down 65%, copper down around a third, soybeans -40%, sugar -20%. It is therefore hardly surprising that there is downward pressure on inflation.
The year-on-year comparisons will begin to normalise and the picture should significantly improve. The deflation we’ve seen is good for consumers because it puts money in their pocket.
We have in fact seen fairly decent retail sales and consumer confidence surveys over recent quarters and bank lending is picking up, albeit slowly.
We welcome the TLTRO II which helps offset the negative interest rate environment for the banks, but it seems the marginal benefits of continued monetary loosening are diminishing.
We may well be in a situation where we need to wait for the benefits of the current programme to feed through.
We accept that if the economy stalls or the core inflation numbers deteriorate substantially from here then we may need to literally resort to the printing press or manufacture a fiscal injection that is acceptable to the core eurozone members.