Wednesday’s market action was tepid because it is the day before two important events. The former FBI director, James Comey, will be testifying in front of Congress and the ECB will be meeting tomorrow. There’s not much I can say about Comey’s testimony which will add to the conversation about the potential political consequences for the GOP and how that will affect the market. What I can say is the market went up modestly after Comey’s statement was made public because the market feels no bombshell will be released. The uncertainty now lies in what he will say when he faces questions.

ECB Responds To Great GDP Growth & Low Inflation

I don’t expect the ECB’s statement to affect the markets much, but obviously it’s worth watching because something unexpected can happen. The chart below shows the G-7 countries’ Q1 GDP growth rates. As you can see, Germany, France, and Italy all grew faster than America. The ECB’s forecast for 1.8% 2017 GDP growth looks like it might be beat. This gives the ECB reason to pause or slow down its $60 billion per month in bond buying when the program expires in December. The ECB is probably going to raise rates from -0.40% after it starts to slow down the bond buying program which means rate hikes are a 2018 event. While this great growth, pushes the ECB in a hawkish direction, it will only change the language in the statement and not policy. The GDP reports which come out in the 2nd half will have a greater effect on policy because that’s when the ECB will discuss publicly how its bond buying program will change in 2018.

The ECB is in a perfect situation. GDP growth is beating expectations, while inflation is decelerating. The ECB’s bond buying isn’t causing inflation just like how the Fed’s QE didn’t cause inflation. There has actually been a disinflationary effect from bond buying. As you can see from the chart below, Danske’s Bank expects the ECB to lower its 2017, 2018, and 2019 HCIP inflation forecasts by one tenth of one percent. The inflation results of ECB are different from what the Bundesbank has been claiming. Whenever inflation ticks higher, it complains the ECB should stop its bond buying. There’s no doubt that the ECB’s bond buying is geared to help the risky nations like Italy because it lowers the default risk their banks have. The ECB’s bond buying will weaken the euro versus the dollar which will help German exports. Because of the latest positive European economic data and the ECB’s easy stance, the European stocks have outperformed their American counterparts.