Europe: Focus on GDP report this week – BBH

Europe will update its preliminary Q4 GDP report and more country-level details will be available and if there is a risk, it is that GDP gets revised higher from the initial estimate of a 0.6% quarterly expansion, according to analysts at BBH.  

Key Quotes

“For many investors, the near-term dynamic is about the impact of the changes in oil prices and the euro for changes in the ECB's staff inflation forecasts in a few weeks.  The decline in oil prices has brought the June Brent back to around where it was for the last staff forecasts, while the euro around four percentage points stronger on a trade-weighted basis.”

“We detect a shift in expectations among many investors.  Previously, many had seemed to believe that the ECB would end its purchases when the current program ends in September.  However, now, with the encouragement of even some of the (perceived) more hawkish members, it seems that many now accept that the purchases will likely be gradually tapered than stopped cold.  There is an important difference between cutting from 60 bln euros a month to 30 bln a month in purchases than going from 30 bln to none.”

“One implication of this is there is scope for further compression of peripheral European yields and German Bunds.  That said, two political risks now loom ahead. 
First, the one every has in their diary is the Italian election on March 4.  The center-right bloc, led by Berlusconi (who cannot vote or run for office) is drawing a plurality.  It is enough for the right-flank of the bloc to draw more attention to their extreme ideas, but not enough to secure a majority.  Berlusconi has tried to re-invent himself as a moderate and the only political force that can stop the populists of the Five-Star Movement.  His partners' rhetoric may raise other questions. The center-left appears to be slipping into third.”

“The second is Germany.  The agreement struck last week between Merkel's CDU/CSU and the Social Democrats (SPD) needs to be ratified by SPD members in a voting process that begins onFebruary 20.  The results will be known around the time as the Italian election in early March.  SPD-head Schulz reclusion as a minister in the new government may be just enough to put the odds in favor of acceptance and a rejection could unsettle markets.”