CITIC Securities: It is hard to see a significant improvement in inflation in the euro zone. The European Central Bank has a high probability of cutting interest rates in September.

In July, the European Central Bank decided to keep the three policy interest rates unchanged, but expressed its emphasis on inflation targets and hinted at the meaning of interest rate cuts. Considering the weakness of manufacturing and economy in the euro zone, the relatively low inflation level and the global monetary policy linkage, without a certain amount of stimulus measures, it is difficult to significantly improve inflation in the euro zone. Therefore, in order to achieve its inflation target, we predict that the European Central Bank will cut interest rates in September.

The interest rate resolution in July kept the three major policy interest rates unchanged, but implied a rate cut. The meeting continued to maintain the previous three policy interest rates unchanged, and Draghi said that he did not discuss the scale of interest rate cuts. However, the resolution also stressed: "As the actual and predicted inflation is lower than the target for a long time, the Council needs to adopt a highly loose monetary policy for a long time. Therefore, if the medium-term inflation prospect continues to fail to achieve its goal, the Council will be determined to take action and use appropriate policy tools to make inflation move towards the goal. " The interest rate resolution implies that if inflation continues to be weak, more appropriate policy tools will be taken decisively, and the high probability is to cut interest rates.

Draghi's position is more dovish. Draghi believes that geopolitical factors, protectionism and the threat of uncertainty in emerging markets have inhibited the development of the economy, especially the manufacturing industry. In this context, inflationary pressures have decreased and inflation expectations have declined. Therefore, it is necessary to adopt a certain degree of monetary stimulus. However, the transmission of rising labor costs to inflation is much slower than expected. The analysis of economic trends and money markets shows that a broad currency is essential for inflation to continue to converge to the 2% target.

After a long period of quantitative easing, the phenomenon of "low unemployment+weak inflation" generally exists in developed economies. At present, the United States, Japan and the euro zone all face the long-term problem of "low unemployment+weak inflation", and the short-term and long-term Phillips curves deviate from the track of experience. In this environment, moderate stimulus is difficult to be effective, and it is not enough to make significant changes in inflation in the euro zone. If the European Central Bank does not start a larger-scale stimulus, the inflation target will be difficult to achieve with a high probability.

Bond market strategy: The ECB's interest rate decision is generally in line with market expectations, releasing a relatively loose signal: if inflation continues to remain weak, it will decisively adopt more appropriate policy tools to stimulate inflation to move toward the target. Considering the linkage between the current economic fundamentals of the euro zone and global monetary policy, we expect the European Central Bank to cut interest rates in September. From the perspective of economy and inflation, the euro zone economy is at home and abroad. External factors include global economic weakness, local trade frictions and Britain's withdrawal from the EU. Internal factors include the accelerated weakening of manufacturing industry and the intensification of domestic contradictions in some member States. In this unfavorable environment, inflation is unlikely to improve significantly without some stimulus measures. Judging from the global game, the Nash equilibrium of the economic downturn cycle will be a global interest rate cut. If the Federal Reserve's interest rate meeting in July also moves towards interest rate cuts, and global monetary policies are linked, there is no reason for the European Central Bank not to cut interest rates, so we predict that the European Central Bank will cut interest rates in September.

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Interest rate resolution: the interest rate has not changed, and the wording is biased.

Previously, the market generally believed that this meeting of the European Central Bank will release a loose signal, and the probability of interest rate cuts in September is even greater. This interest rate resolution is generally in line with market expectations. Draghi had previously hinted that stimulus measures were coming, and the market generally believed that the July meeting of the European Central Bank would release a more relaxed signal. But there are different views on when to cut interest rates. Most people think that September is more likely, and some people think that interest rates will be cut in July. However, with the IMF's downward adjustment of global economic growth expectations and the weak initial PMI of the European Central Bank in July, the market seems to have expectations for the ECB's interest rate decision in July. In this interest rate resolution, although Draghi's speech was more dovish than before, there was no unexpected interest rate cut.

Comparison of interest rate resolutions in June and July

The interest rate resolution in July kept the three major policy interest rates unchanged, but implied a rate cut. The meeting continued to maintain the previous three policy interest rates unchanged, and Draghi said that he did not discuss the scale of interest rate cuts. However, the resolution also stressed: "As the actual and predicted inflation is lower than the target for a long time, the Council needs to adopt a highly loose monetary policy for a long time. Therefore, if the medium-term inflation outlook continues to fail to reach its target, the Council will be determined to take action and use appropriate policy tools at any time to make inflation move towards the target. " The interest rate resolution implies that if inflation continues to be weak, further policy tools will be taken decisively, and the high probability is to cut interest rates.

Draghi's position is more dovish.

Draghi reiterated the policy statement of the European Central Bank at 8:30 pm Beijing time, and then expressed his views on the coordination of economic, inflation, monetary and monetary policies with structural reforms and fiscal policies. The main points are as follows:

The manufacturing industry is still under great pressure, with employment and wages supporting the recovery of economy and inflation in the medium term and moderate expansion of fiscal and monetary policies. Compared with June, Draghi's description of the economy has not changed much. Although the further increase in employment wages is still the supporting force for economic recovery, the weakening of global growth momentum and weak international trade still put pressure on the prospects of the euro zone. In addition, geopolitical factors, protectionism and the threat of uncertainty in emerging markets have inhibited the development of the economy, especially the manufacturing industry. In this context, inflationary pressures have decreased and inflation expectations have declined. Therefore, it is necessary to take some monetary stimulus measures to ensure a relatively stable economic situation, support the expansion of the euro zone and the rise of domestic price pressure, so as to promote the overall inflation level in the medium term. Draghi believes that global trade has a great impact on manufacturing, but employment and wages in the euro zone are still improving, and fiscal and monetary policies will be moderately expanded to ensure economic growth.

Core inflation is still below the target and is expected to rise again at the end of the year. Although higher productivity utilization rate and tighter labor market make labor costs rise, the transmission of rising labor costs to inflation is much slower than expected. It is expected that under the expansionary monetary policy, strong wage growth and economic expansion, the potential inflation will rise. Monetary policy measures, including the Long-term Refinancing Operation (TLTRO III) to be launched in September, will help maintain a suitable bank loan environment and help enterprises, especially small and medium-sized enterprises, raise funds. Generally speaking, the analysis of economic trends and money markets shows that a wide currency is crucial to the goal of inflation convergence to 2%.

The euro zone's economy is weak and its prospects are worrying.

The prospects of the euro zone are worrying because of its internal and external troubles.

Since 2 0 18, the political situation in Europe has been unstable, and the euro zone economy is at home and abroad. The "yellow vest" movement has brought heavy losses to the French economy, and people's dissatisfaction with income has become increasingly apparent; In order to please voters, successive Italian governments blindly expanded the government budget and increased the welfare for voters, which exceeded the ability of sustainable fiscal policy. Now they are in deep debt crisis and face fines from the European Union. From the external environment, the economic growth rate of countries around the world is slowing down, but the synchronization is increasing. The downturn in global trade and manufacturing has become the main external factor of the economic downturn in the euro zone.

The risk of Britain's withdrawal from the EU is rising, and the euro zone economy is facing an impact. The euro zone is inextricably linked with Britain. If Britain leaves the European Union, it will bring heavy losses to the euro zone economy. The process of Britain's withdrawal from the EU is full of twists and turns, and there are different opinions among various parties and between Britain and the EU. Less than 100 days before the deadline for Britain to leave the EU, the new British Prime Minister Johnson took office to form a cabinet. He said that he would lead Britain to leave the EU before 10, "no ifs, no buts". The appointment of the new prime minister undoubtedly increases the risk of Britain's hard-Britain's withdrawal from the EU and casts a shadow over the future of European economy.

The euro zone economy is under pressure, and the manufacturing industry has declined significantly.

Consumption is still supported in the short term, but it will weaken with the economy in the long run. The turning point of economic downturn is often first reflected in manufacturing. Consumption is closely related to residents' income and will not follow the changes of manufacturing industry. Only when the manufacturing boom continues to decline, enterprises begin to lay off employees or reduce wages on a large scale, and the unemployment rate rises, residents' income will be more obviously felt and consumption will be obviously suppressed. Therefore, the change of consumption lags behind the manufacturing industry, and it still has some support in the short term, but the long-term weakening trend is inevitable. Starting from 20 18, the euro zone economy began to weaken, and today, consumption also shows signs of weakening. From the perspective of housing prices and retail sales, the growth rate of housing prices turned around at the beginning of the year, and the focus of retail sales growth this year has also moved down.

Low unemployment rate+low inflation

"Low unemployment rate+weak inflation" is the common feature of major developed economies at present. After a long period of quantitative easing stimulus, all major developed economies are facing the situation of falling unemployment rate and long-term weak inflation, and the United States, Japan and the euro zone are all facing the same problem. Both short-term and long-term Phillips curves deviate from the track of experience and cannot explain the relationship between the current unemployment rate and inflation well.

As far as the euro zone is concerned, the unemployment rate in the euro zone, which has been high for a long time in history, has shown a long-term downward trend since 20 13. Although the current economy is not optimistic, employment has not been affected, and the unemployment rate has dropped to 7.5%, second only to the low level before the 2008 financial crisis. Under the low unemployment rate, wages rose moderately. In the first quarter of 20 19, the hourly labor cost increased by 2.4% year-on-year, and the growth rate was in a moderate rising range. Inflation, on the other hand, is relatively low and has been fluctuating around 1% in recent years. Although the European Central Bank has always emphasized the inflation target of 2% in its forward-looking guidelines and maintained the QE operation before 20 18, the actual inflation is still far from the target.

Bond market strategy

The European Central Bank's interest rate decision is generally in line with market expectations, releasing a relatively loose signal: if inflation continues to remain weak, it will decisively adopt more appropriate policy tools to stimulate inflation to move toward the target. Considering the current economic and inflation situation in the euro zone and the linkage of global monetary policy, we expect the European Central Bank to cut interest rates in September. From the perspective of economy and inflation, the euro zone economy is at home and abroad. External factors include global economic weakness, local trade frictions and Britain's withdrawal from the EU. Internal factors include the accelerated weakening of manufacturing industry and the intensification of domestic contradictions in some member States. Although consumption, employment and wages remain relatively healthy, it is difficult to maintain a high probability. In this unfavorable environment, without a certain amount of stimulus, it is difficult for inflation to improve significantly. Judging from the global game, the Nash equilibrium of the economic downturn cycle will be a global interest rate cut. If the Federal Reserve's interest rate meeting in July also moves towards cutting interest rates, which is linked to global monetary policy, the European Central Bank has no reason not to cut interest rates. Therefore, we predict that the European Central Bank will cut interest rates in September.

(Article source: Qing Bi Tan)

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