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Benoît Cœuré & German Wages - February 6, 2018

Benoît Cœuré

At the Financial Times European Financial Forum last week, ECB member Benoît Cœuré gave a speech titled “What Yield Curves Are Telling Us”. In it he assured investors that “the flattening of the US yield curve is unlikely to signal a looming depression”. But more importantly, he concluded with, “we see no such inflation risks (in the Eurozone) at the current juncture”, adding that “inflation is expected to converge only very gradually to levels closer to 2%... an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up”. Thank goodness, move along, nothing to see here.

But sprinkled through the paper are some admissions that bear heeding, because they suggest a subtle but very significant change of tack. These include:

“[P]rices are likely to be driven by more price-sensitive investors this time around” as opposed to during Greenspan’s tenure. Even the ECB “noted the risk of a sudden repricing in fixed income markets should investors decide to rebalance their portfolios.”

“Oil prices may be a potential catalyst....[E]nergy price shocks have become considerably more persistent lately... as oil prices have moved higher in recent weeks, the inflation risk premia also rose”

These admissions, along with discussions about European equities and fund outflows, which Cœuré highlighted in a previous speech, though counter to the ECB’s current consensus view, offer an excellent opportunity to fine tune mental models and augment our own mental if-then statements.

German Wages:

A few weeks ago, an article from AP highlighted that IG Metall, Germany’s largest industrial union, was asking for a reduced work week for two years and a stiff raise:

“In arguing for a 6 percent wage increase, the IG Metall union argues that 2 percentage points would compensate for inflation while workers deserve the other 4 percent as a share in companies' increased productivity as well as the businesses' "economic success and increased prosperity."

Well the results are in. Rather than the six percent they aimed for, after costly strikes at large firms including Daimler and BMW, the union was able to negotiate for a 4.3% raise, with some added sweeteners in the form of one-off payments. While the negotiator for the employers stated that “The size of the award will be hard to bear for some businesses”, the article notes that “the cost to employers would work out at below 4 percent per year”. …PS that a lot higher than the current 2.2% rate.