In line with consensus expectations, the ECB decided to left rates unchanged at 1%. In the press conference at the end of the meeting, the ECB president Mario Draghi downgraded the view on the economic outlook.
Indeed in May Mario Draghi said that "economic activity is expected to recover gradually over the course of the year. At the same time, as we said previously, the economic outlook continues to be subject to downside risks."
In June Draghi noted that "economic growth in the euro area remains weak, with heightened uncertainty weighing on confidence and sentiment, giving rise to increased downside risks to the economic outlook."
The eurosystem staff left the 2012 GDP projection unchanged at -0.1% compared to March's estimate but lowered its projection for 2013 GDP from 1.1% to 1%. The eurosystem staff confirmed its projection that the CPI will fall below 2% in 2013.
The downgrade of the economic outlook and the expectations that the CPI will fall below 2% pointed in the direction of a further easing of monetary policy as soon as in July. Moreover, Draghi said that the ECB is able to act in firm and timely manner.
A rate cut seems to be the most likely option as some members of the ECB has already voted to cut rates today.
However, we do not see the ECB acting soon as:
1) The ECB has said in the past that lowering the Refi rate below 1% is not useful.
2) Draghi said that while the LTROs prevented a credit crunch, it is an issue if more LTROS would be effective.
3) Draghi highlighted that Euro problems have nothing to do with the ECB monetary policy.
With the latest point, the ECB confirmed its view that it is up to the EU leaders to resolve the debt crisis. For these reasons pressures on the EU leaders to find a solution during the European Council on 28/29 June - implementing eurobonds, project bonds, banking union or deposit guarantee scheme - will remain high.
The optimism on a positive solution on the debt crisis was reinforced by the weakest the expected data for April released over the week in Germany:
1) Factory orders fell by 1.9% m/m and 3.8% y/y.
2) Industrial production tumbled by 2.2% m/m and 0.7% y/y.
This data indicate that Germany may no longer consider itself as insulated from the current crisis. In this scenario, the German Chancellor Merkel may stop saying "No" to all the EU proposals, as underlined by Ambrose Evan-Pritchard on the Telegraph ("Nein!Nein!Nein!Again").
This may sustain the European equity markets in the weeks ahead of the meeting, with the Greek election on June 17th that is the main source of uncertainty. While we confirm for the moment our view in the article "The Euro Zone is in a mess" that the S&P500 will outperform the DJ Eurostoxx and that inside the eurozone the German DAX is our preferred market, the expectations that EU leaders will agree on measures to ease the debt crisis may favor the overperformance of the peripheral countries, at least in the short term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.