THE EUROZONE ECONOMIC MONITOR MARCH 5, 2021

CLAUS VISTESEN, CHIEF EUROZONE ECONOMIST

exception of some mortgage rates, the answer likely

The ECB's messaging on the sell-off in bonds
remains unclear, but we think it's slightly worried.
Watch short-term rate expectations, and BTP
spreads, for signs of accelerated QE from the ECB.
PEPP purchases have stabilised at just under €60B
per month; the ECB has plenty of room to do more.
An Increase in PEPP Purchases is
Coming, But Don't Expect a Surge
We are sympathetic if euro area fixed income investors
are slightly confused about the ECB's intentions. As
we showed earlier in the week recent official comments
suggest that the governing council has become
apprehensive about the increase in bond yields. This
view was cemented on Wednesday by executive board
member Fabio Panetta's comment that a "steeper
nominal yield curve must be resisted", reiterating his
view that the EZ economy is still "vulnerable to downside
risks. "Bank of Spain Governor, Pablo Hernández de Cos,
chimed in with the comment that the ECB "must avoid a
premature rise in nominal yields." Bundesbank president,
Jens Weidmann, not surprisingly, offered the only slightly
dissenting view, noting that the move in yields isn't
"particularly worrisome".
When all was said and done, however, financial
media reported that the ECB "sees no need for
drastic action to curb bond yields." The confusion
about the central bank's position on higher long-term
is that policymakers will step in if, and when, equities
and credit spreads deteriorate. So far, both have
been resilient to the sell-off in bonds, and as our Chief
Economist, Ian Shepherdson, argued last week, equities,
at least in the U.S., likely will be resilient to higher bond
yields, up to a point.
In the Eurozone, speculation about the ECB's
interpretation of rising bond yields has been complicated
by Ms. Lagarde's reference in January to a "holistic"
definition of financial conditions, with both economic and
market-based indicators, as a yardstick to determine the
pace of PEPP purchases. We know spreads between core
and peripheral bond yields matter—in particular between
bunds and BTPs—but what else?
Last week's speech by Philip Lane, The Compass
of Monetary Policy: Favourable Financing Conditions,
provided a glimpse of the central bank's definition of
financing conditions, but shed little light on whether
current conditions warrant a response.
Reading between the lines, however, they probably do.
Mr. Lane's reference to the overnight index swap—OIS—
curve suggests that the ECB is monitoring short-term rate
expectations. This makes sense. A steeper yield curve
is fine, as long as it reflects rising growth and inflation
expectations, but if those expectations filter down to a
shift in the short-term rate outlook, it would challenge the
central bank's forward guidance. The chart below shows
IS THIS TOO FAR TOO FAST FOR THE ECB?
Eurozone, rate futures curve, %* (Left)
Eurozone, yield curve, 10y less 2y, % (Right)

rates partly reflects a global story in which investors are 0.20 0.6
*ERZ2 less ERZ1, and ERZ3
0.18 less ERZ2, equally weighted.
trying to figure out when, if at all, the rise in long-term 0.16 0.5
bond yields becomes detrimental to growth, triggering a 0.14 0.4
0.12
response from central banks.
0.10 0.3
From a macroeconomic point of view, this point is 0.08
0.06 0.2
reached when the rise in yields feeds through to higher
0.04 0.1
financing costs for firms and households, constraining 0.02
consumption and investment. But because such 0.00 0.0
Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21
indicators are difficult to track in real time, with the

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THE EUROZONE ECONOMIC MONITOR MARCH 4, 2021
WWW.PANTHEONMACRO.COM

Next week's meeting, and the updated staff

IS THIS ONE OF THE ECB'S NEW FAVOURITE POLICY INDICATORS?
projections, provide an opportunity for Ms. Lagarde and
ECB lending survey, net share of banks tightening lending standard, %*
* To businesses.
her colleagues to provide further clarity about the ECB's
Recessions 80 intentions. We think an acceleration in PEPP purchases is
70
60
a fair bet over the next two-to-three months. But this isn't
50 a slam dunk, given the looming leap in headline inflation,
40 which will embolden hawks on the governing council to
30
20 lean against an increase in purchases.
10 In any case, markets won't have full transparency over
0
PEPP purchases due to the program's design; we know
-10
-20 the overall committed amount, but not how much is being
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
spent in advance. The central bank has bought €50-to-
60B per month since December, a number we think will
that euribor futures are now pricing-in a 10dp deposit rise to around €80B-to-90B, eventually, at the end of
rate hike by the end of 2023. This is not catastrophic, but Q2. More generally, the central bank likely won't nail its
we are confident that the ECB won't tolerate this trend colours to the mast on a definition of financial conditions
extending too far too fast. as a guide to the pace of QE, at least not next week.
Looking beyond market-based indicators, Mr. Lane's
speech suggests that the ECB is also looking at bank IS IT TIME FOR THE ECB TO STEP ON THE GAS?
lending and credit standards for evidence that financial ECB, weekly PEPP purchases, four-week average, €B
conditions are tightening. This sounds great, except that * Latest data are final week of February.
35
loan growth data tend to be lagging indicators in the 30
Eurozone, at least in year-over-year terms. The so-called 25
credit impulse—the second derivative of annual loan
20
growth—is better, but that's effectively similar to the trend
15
in narrow money growth. As far as credit standards are
10
concerned, the ECB's bank lending survey is detailed, but
5
also released on a quarterly basis, offering a poor real
0
time indicator for financial conditions. Apr 20 Jul 20 Oct 20 Jan 21 Apr 21
That said, our previous chart shows lending standards
tightened significantly in the second half of last year.
It's hardly suprising that banks are tightening the
THE CENTRAL BANK HAS PLENTY OF ROOM TO SUPPORT MARKETS
screws in response to the collapse in economic activity
ECB PEPP portfolio, in €B*
over the past 12 months. It is an ominous sign all the
2000
same, though, hinting that financial conditions for the 1800
real economy are deteriorating, on the cusp of what is 1600
supposed to be a strong post-vaccination recovery. 1400
1200
The problem for the ECB is that an acceleration in QE 1000
probably will have little impact on banks' willingness to 800
*As of February, a linear use of the
lend. Even sweetened TLTRO funding probably wouldn't 600
committed PEPP amount would
allow the ECB to buy about €18B 400
do much in light of the already very attractive terms of 200
per week until March 2022.
this facility. This leaves a fiscal response, mainly in the 0
Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Jan 22 Apr 22
form of extending loan guarantees, as the most effective
way to ensure the flow of credit to the private sector as
the recovery gets underway. Needless to say, the ECB
CLAUS VISTESEN +44 191 2600 308
doesn't have much influence over that, though we suspect claus@pantheonmacro.com Twitter: @ClausVistesen
the central bank will be lobbying for an extension.
© 2021 Pantheon Macroeconomics | 400 Columbus Avenue Suite 10S, Valhalla, NY 10595 United States | All rights reserved | No secondary distribution without express permission.
THE EUROZONE ECONOMIC MONITOR MARCH 4, 2021
WWW.PANTHEONMACRO.COM

THIS WEEK IN BRIEF PANTHEON EUROZONE FINANCIAL CONDITIONS DASHBOARD

Note: “D” prefix denotes Datanotes for these releases. Market Valuation* Six month change, % y/y, %
Monday, March 1
Eurostx 50 +4.8 +9.7 +9.2
• D: Final Manufacturing PMIs, Eurozone (2) 10:00 CET
Dax 30 +2.8 +5.8 +16.0
The final manufacturing PMI in the Eurozone rose to 57.9 in
February from 54.8 in January, slightly higher than the consensus CAC 40 +3.5 +14.0 +7.4
and first estimate, 57.7. * P/E ratios in standard deviations from 10y average (>1.5
• D: Saxony CPI, Germany (2) 11:00 CET expensive, <-1.5 = cheap)
Headline inflation in Saxony increased by 0.3pp in February, to
0.3%, lifted by higher energy inflation.
• D: Advance Inflation, Germany (2) 14:00 CET Bonds Curve Six month change, bp y/y, bp
Headline inflation in Germany rose by 0.3pp in February, to GER (10-2) -3.4 +14.7 +24.1
1.3%, booted by a further leap in energy inflation. FRA (10-2) -3.1 +8.3 +18.7
Tuesday, March 2 ITA (10-2) -3.2 -12.3 -12.0
• D: Retail sales, Germany (1) 08:00 CET ** Curve in standard deviations from its 10y average (>1.5 =
Retail sales in Germany plunged by 4.5% month-to-month in historically steep, <-1.5 = historically flat)
January, depressing the year-over-year rate to -5.5%, from +0.2%
in December, pointing to grim numbers for Q1 as a whole.
• D: Unemployment, Germany (2) 09:55 CET EUROZONE EXCESS LIQUIDITY VS MSCI EU (EX UK)
Headline unemployment in Germany was unchanged at 6% in Eurozone, excess liquidity*, advanced two quarters, y/y% (Left)
February, with claims rising by 9k. MSCI EU ex-UK, y/y% (Right)**
• D: Advance Inflation, Eurozone (2) 11:00 CET 28 * M1 less nominal GDP growth. Q4 is PM forecast. 60
24 ** Q1 is available data.
Headline inflation in the EZ was unchanged at 0.9% year-over- 40
20
year in February, with the core rate dipping by 0.3pp, to 1.1%, 16
both numbers in line with the consensus. 12 20
8
Wednesday, March 3 0
4
0
• D: Final PMIs, Eurozone (2) 10:00 CET -20
-4
The composite PMI in the Eurozone rose marginally in February, -8 -40
to 48.8 from 47.8, slightly higher than the initial estimate and -12
consensus, 48.1. The fall in EZ economic activity is now likely -16 -60
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
stabilising after the new virus restrictions midway through Q4, but
a double-dip recession still looms. EZ equities have sold on the past week, probably responding
to the leap in global bond yields, thereby matching the slide
Thursday, March 4
in U.S. and global equities. The trend in excess liquidity is still
• D: Unemployment, Eurozone (1) 11:00 CET strong, but the rise in bond yields now poses a serious short-
Headline unemployment in the euro area was unchanged at term challenge for valuations.
8.1%, following a downwardly-revised headline in December.
These data look great, but they remain distorted significantly by PANTHEON’S EUROZONE ECONOMIC FORECASTS
(GDP: REAL GDP Q/Q%)*
government furlough and job-retention schemes.
GDP
• D: Retail sales, Eurozone (1) 11:00 CET
Retail sales in the Eurozone fell by 5.9% month-to-month in Q4 20 -0.6 2018 year: 1.8
January, primarily due to weakness in France and Germany. The Q1 21 forecast -1.5 2019 year: 1.1
year-over-year rate fell to -6.4%, the lowest since April last year,
Q2 21 forecast +1/1.5 2020 year: -7.0
from a revised +0.9% in December.
Q3 21 forecast +2-to-2.5 2021 year: 3.4
Friday, March 5
Q3 21 forecast +1.0 2022 year: 4.3
• D: Factory Orders, Germany (1) 08:00 CET
Factory orders in Germany likely increased by 2.6% month-to-
month in January, driving the year-over-year rate down to 4%, CPI y/y, % Unemployment, %
from 6.4% in December, due to base effects. Survey data indicate
Ferbruary 0.9% January 8.1%
that the acceleration in German manufacturing is now petering-
out, but a sustained lift to GDP growth in Q1 is still very much in March 2.0% February 8.1%
the cards. Consensus: 0.8%. April 4.5% March 8.2%
• D: Trade Balance, France (1) 08:45 CET
May 2.5% April 8.3%
We think the headline trade deficit in France widened to €4.5B
in January, from €3.4B in December, due to a rebound in imports June 2.0% May 8.3%
amid flat-lining exports. Consensus: N/A. * FORECASTS ARE SUBJECT TO MORE UNCERTAINTY THAN USUAL AT THE MOMENT

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