ECB Update: The Road to Damascus

1. Today's 25bps cut by the European Central Bank was the third one this year--and should help the European economy on its path to recovery. 
2. The ECB has (finally) started paying attention to two facts: that the Eurozone has been stagnating for a while, and that downside risks to inflation now outweigh the upside risks. Surprisingly, Lagarde referred to this directly. 
3. Today's cut will allow the ECB to catch up. Significant downside risks to the economy remain, including the U.S. election and a deflationary savings dynamic taking hold among EU consumers. 

 Details below (for Aurora clients only):

• Today's cut was well expected by markets--it was priced in entirely following the Fed's 50bps cut in September. 
• Regular readers will know this came as a bit of a surprise to us--though the economic data moved as we expected, the Governing Council (GC) moved faster than we expected.
• To be fair, the cut surprised the ECB as well, and President Christine Lagarde mentioned that the economy had not unfolded in the way the GC expected at its September meeting. 
• How to explain the shift? Our sense is that the economic data mattered more than the Fed's shift--but they both played into the GC's thinking in the leadup to today's move. 
• Lagarde spent an unusual part of her opening statement calling out economic data including PMI surveys, the BLS survey, inflation surveys, and even called out the Eurozone's savings rate (15.7%, well above pre-COVID levels).
• This is significant because it indicates there has been a shift in the GC's framing of the economy--namely, Euro area policymakers are (rightly) concerned a deflationary dynamic is taking hold. 
• The move they made today can be seen as a corrective measure and, on balance, it is likely to work.
• In fact, the bank lending survey indicates that loan demand is already recovering strongly, especially in the residential sector. (see chart below)
• While not exactly a direct boost to consumption, every little helps when it comes to releveraging the European economy.

• It also cannot come soon enough. Persistently high savings rates mean consumers are clearly more concerned about growth than they are about inflation. (otherwise they would be spending their purchasing power today)
• Finally, weak economic data in Germany, forced fiscal consolidation in Italy and France, and a negative outlook for international trade with both the U.S. and China mean the ECB remains the only game in town when it comes to resuscitating the Eurozone economy. 
• Following today's decision (and CPI print), the realized real deposit rate stands at 155bps-- still very near historic highs for the ECB.

• If it wants to be ahead of the curve, the ECB needs to continue to ease at least at the current pace--and ideally cut by 50bps in December. 
• We still view a series of 25bps cuts as the more likely outcome.
• Which brings us to the second variable to today's decision--the Fed's 50bps cut in September. 
• While Fed moves don't mechanically cause the ECB to move, policymakers in Europe will be quite attentive to an unwanted strengthening of the euro--and today's cut is at least partly aimed at preventing this. 
• Overall, Lagarde's attention seems to have shifted meaningfully since September-- to the point that she claimed during the press conference that downside risks to inflation now loom larger than the upside risks. 
• For a single-mandate central bank, this is as dovish a signal as they come.
• This is good news for the Eurozone economy as a whole, and we maintain that, despite all the domestic and international challenges facing the bloc, 2025 growth will comfortably exceed this year's levels. 

All best, 

Dimitris and the Aurora team.

To book a meeting with me to discuss these or any other Aurora themes contact juliet@auroramacro.com

Disclaimer  

This newsletter is a general communication being provided for informational and educational purposes only. It is not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication, you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

None of Aurora Macro Strategies, LLC, its affiliates, or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that consider all of the particular facts and circumstances of an investor's own situation. Neither Aurora Macro Strategies or any third party involved in or related to the computing or compiling of the data makes any express or implied warranties, representations or guarantees concerning information or perspectives included in written research. In no event will Aurora Macro Strategies or any third party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any use of this information.

This report has been created without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments.

The text, images, and other materials contained or displayed on any Aurora Macro Strategies, LLC product, service, report, email, or website are proprietary to Aurora Macro Strategies, LLC and constitute valuable intellectual property. No material from any part of www.auroramacro.com may be downloaded, transmitted, broadcast, transferred, assigned, reproduced or in any other way used or otherwise disseminated in any form to any person or entity, without the explicit written consent of Aurora Macro Strategies, LLC. All unauthorized reproduction or other use of material from Aurora Macro Strategies, LLC shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Aurora Macro Strategies, LLC expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Aurora Macro Strategies, LLC reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

The recipient should check any email and any attachments for the presence of viruses. Aurora Macro Strategies, LLC accepts no liability for any damage caused by any virus transmitted by this company’s electronic communications.