DUHEN TODAY

The ECB is prepared to support the European economy. Yesterday's ECB meeting was one of transition and did not give rise to a change in monetary policy. Mario Draghi nonetheless took a slightly more cautious tone on the economic context owing to the ongoing deterioration of the manufacturing sector. Although risks are still oriented to the downside on the scenario, the ECB still expects to see an improvement in growth during the year, while certain negative factors are starting to fade (automobile sector and 'yellow vests'). That said, were the economic situation or the transmission of monetary policy via the banking channel to deteriorate more than expected, Mario Draghi is prepared to take any measures that are needed. His action could require more favourable conditions for the TLTRO planned in September or new measures to offset the impact of negative rates on banks' ROE and thus their ability to finance the economy. While certain members of the ECB have discussed exempting some bank reserves from the -0.4% deposit rate, Mario Draghi affirmed yesterday that this option was not being considered. We do not believe that ECB would take such a step unless there is a deterioration of the economic environment, which is not our forecast for the next few months. On the contrary, a rebound of activity in H2-2019 should offer support for inflation and the withdrawal of the ECB, which we plan from summer 2020 (first increase in the deposit rate).

The Fed faces temporarily weak inflation. The minutes from the March meeting did not hold any surprises and confirmed Jerome Powell's comments during the conference and those from other members since then. The institution is concerned about the inflation trajectory which is not picking up despite pressure on costs (salaries and customs duties), which can be explained by the rebound in productivity as indicated in the press release and by the president. For the time being, the latest inflation figures (CPI for March published yesterday and PCE for January published on 29 March) confirm that prices will remain penalised in the first half of the year in the wake of the strong dollar, a rebound in productivity and wages that are struggling to rise. In the second half of the year, the gradual fading of the first two factors as well as an acceleration in wage increases should allow inflationary pressure to gain traction. Against this backdrop, the Fed, which is behind the curve, will prolong its pause throughout 2019, the time needed to observe several months of inflation beyond the target level of 2%, before carrying out new key rate hikes. US inflation will find additional support from the signing of a US-China trade agreement by the summer, reinforced by communication by both parties. Yesterday, US Treasury Secretary Steve Mnuchin announced that Washington and Beijing have practically validated the conditions for the enforcement mechanism regarding the application of a trade agreement, a subject that was the sticking point until now.