The account of the September meeting released two weeks ago showed that had been a considerable divergence of views within the Governing Council around the proportionality of this response to the prevailing conditions. This was largely the focus of the post-meeting press conference, with President Draghi explaining that while disagreements are "part and parcel" in policy decisions the actions taken were necessary to bolster its accommodative stance as it had "been affected by the regularly, continuously weakening medium-term outlook". Furthermore, the data received since that meeting had shown that the "Governing Council's determination to act in a substantive manner was justified". Released just before Thursday's meeting, Markit's Purchasing Managers' Index (PMI) for October showed manufacturing activity stabilising at a weak level of 45.7 against a still-resilient services sector at 51.8 (readings > 50 signal expansion). Looking ahead, the risks to the growth outlook in the euro area "remain on the downside" impacted by the ongoing uncertainties posed by "geopolitical factors, rising protectionism, and vulnerabilities in emerging markets". As such, President Draghi reiterated his call for governments, where they had the appropriate space, to step-up fiscal stimulus. This was a point he later reinforced in response to a question regarding the potential problem of the ECB running up against their self-imposed limits on bond purchases. Basically, this was not likely to materialise if countries that had the capacity to do so increased bond issuance to facilitate fiscal stimulus.
As this was President Draghi's final meeting of his notable 8-year tenure at the helm of the Governing Council it is worth reflecting on. A transformative and innovative central banker, Draghi was influential in the preservation of the euro as the bloc's single-use currency during the early years of his tenure which coincided with the sovereign debt crisis. Fiscal imprudence and structural weakness inherent in member states' economies sparked concerns of widespread sovereign defaults and this, in turn, severely impacted the banking and financial system. Draghi's mid-2012 speech in London was the moment when things began to turn due to his now-famous pledge: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough". Fast forward to late 2019; the euro still exists, a deflationary spiral was avoided, the unemployment rate has returned to pre-crisis levels (shown as chart of the week, below) and public support for the euro is at a record high.
Chart of the week
In the UK, Brexit developments during the week saw the Parliament support an in-principal vote for PM Johnson's withdrawal deal but reject the timeframe to fast track the proposal. As such, the 31 October deadline will pass by, however the EU confirmed on Friday it had accepted the UK's request for an extension, though it postponed a decision on the new withdrawal date until next week. In the interim, PM Johnson will push for an early election to take place on December 12.
Moving over to the US, Markit's Manufacturing PMI pointed to signs of stabilisation in the sector, with October's reading coming in above expectations at 51.5 from 51.1 in the previous month. Supporting the result were gains in output, new orders and employment. Some caution is probably warranted, though, given the more closely-followed ISM manufacturing survey showed a sharp contraction in September and October's update is due next week. The Services PMI firmed slightly from 50.9 to 51.0, indicating that business activity lifted to its strongest level in 3 months. However, the employment sub-index declined for the second straight month and this points to a more rapid slowdown in the hard data ahead of October's non-farm payrolls report that is out next Friday. Also notable was that durable goods orders data disappointed to the downside in September. Headline orders slumped by 1.1% in the month and the less volatile 'core' orders declined by 0.5% suggesting that business investment remains weak in the face of headwinds from trade tensions and a slowing global economy. Overall, the Composite PMI showed a marginal improvement from 51.0 to 51.2, but this implies US GDP growth was tracking at a below-trend annualised pace of around 1.5% at the start of Q4. The 1st estimate of Q3 GDP growth is due out next Wednesday and is expected to slow from 2.0% to 1.5%. Undoubtedly, the key event in the US next week is the Federal Reserve's policy meeting (29th & 30th) where the Committee is likely to deliver another 25 basis point rate cut to take the range of the fed funds rate to 1.5% to 1.75%.
Lastly, in a very light week for events and data in Australia, CBA's 'flash' Composite PMI showed that business conditions softened in October but remained slightly expansionary at a reading of 50.7 from 52.0 in September. Conditions in the services sector slowed from 52.4 to 50.8 reflecting softness from new orders, employment and confidence. Meanwhile, the reading for the manufacturing sector stabilised at 50.1 from 50.3 in September but weakness was evident in new orders, with firms cutting back on purchases and inventories in response to soft demand.
