European Confidence Slips In May

One of my themes for 2015 is that central bankers do not like volatility in financial markets because it creates uncertainty and in turn erodes confidence.

Confidence is important to to economic growth because consumers need to be confident about their future prospects in order to spend.

Businesses need to be confident in order to invest in growth.

Otherwise both will postpone their spending and investment decisions until they become more confident.

Central Bankers have been fighting volatility with stimulative ("easy") monetary policies  since 2008 in order to curb volatility and inspire confidence.

The European Central Bank (ECB) embarked on an aggressive bond buying strategy at the beginning of 2015 as a form of "Quantitative Easing" to jump-start a European economy that has been been stalled and suffering from deflationary pressures.

The impact of the the bond buying strategy drove short-term interest rates into negative territory and German bond yields to close to 0 in mid April.

However, at the end of April and into early May bond market volatility spiked as bond investors became more concerned about the future end of the Quantitative Easing and a jump in inflation.

This spike in volatility combined with the concerns over Greece has impacted European Confidence in May:

• This morning, data showed that European Area Business Confidence fell in May after having been improving earlier this year:

• Also this morning, data showed that European Area Consumer Confidence declined for the 3rd month in a row:

In light of the volatility in early May, the ECB , in an effort to bring it under control, announced that they were increasing their bond buying in May and June. This has decreased volatility, but it remains to be seen if this will impact future consumer and business confidence.


Stay tuned....