The odds for European Central Bank President Mario Draghi to add additional monetary measures to help boost the European economy are starting to tick higher with each and every weak economic data release. And I believe he will likely act in September.
Take for example the Citigroup Economic Surprise Index for the European Union. This index has been below 0, which represents worse than expected economic data, since late March. And this likely suggests a continuation of soft economic data. And to make matters more pressing, the latest release of 2nd quarter GDP numbers shows that the European Union is struggling to muster any growth, while unemployment numbers continue to climb.
One specific chart that is making investors and policy members uneasy has to do with inflation expectations. Taking a look at the chart below, one can see that inflation expectations are crashing towards the 2008 lows. Inflation expectations on the two year Zero-Coupon Inflation Swap declined -44% year-to-date (as of 8/26/14). The two year swap is a good indication of short-term inflation while the five year swap gives policy makers a better look at medium-term inflation. Draghi likely has this on his radar.
In a recent release from Citigroup Inc., some economists are predicting a massive 1 trillion euro package of broad-based asset purchases throughout the entire European Union.
European bond market yields have also plunged. Yields on short-term German bonds (3 month to 3 year) have recently turned negative.
Source: Bloomberg
German 10 year bond yields have reached a record low, coming in at .90 on the 10 year. These unprecedented low yields are a sign of economic weakness and investors seem to be losing confidence in Europe. I suspect the ECB and Draghi will want to counter this with a shot of confidence.
 Source: Bloomberg
Taken together, it’s fair to say that the upcoming September ECB meeting is very important. And if Draghi is unable to convince the markets that his measures are strong enough, then I’d expect another influx of volatility to hit the global equity markets.
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