The economist Isabel Schnabel, who is a member of the Executive Committee of the European Central Bank (ECB), considers that the markets are giving too much importance to the possible impact that the delta variant of Covid-19 can have on the economic growth of the euro zone, which which in turn is reflected in the prices of sovereign bonds, where investors seek refuge from a threat that is not what it seems.
“The market may be overestimating the risks to global growth prospects derived from the expansion of the delta variant, more contagious,” said Schnabel during his speech this Wednesday at a ceremony held in Frankfurt.
The central banker explained that “there is no doubt” that the variant has begun to affect mobility and business conditions in contact-intensive sectors. Likewise, Schnabel also believes that this new variant is likely to exacerbate and lengthen existing supply chain problems.
The factors that may explain current bond market conditions continue to be the subject of intense market speculation. “Our analysis shows that, in the US, adverse macroeconomic shocks, most likely related to covid-19, have systematically lowered long-term interest rates since approximately May. To some extent, this seems surprising,” says the expert.
The explanation for the Delta variant becomes even more of a mystery when you look at recent trends in the equity markets, which have continued their rally undeterred throughout the summer. Today, the Euro Stoxx is 15% above its pre-pandemic level. The Standard & Poor’s 500 Index is currently almost 40% above its pre-pandemic level.
“In other words, to the extent that lower real yields really reflect growth concerns, this would point to a decoupling between sovereign bond market prices, on the one hand, and equity market growth expectations. and from the analysts, on the other, “says the German economist.
“But the expectations of the market analyzes suggest that this ‘shock’ is widely perceived as short-lived,” the German said.
Last week, the ECB revised up its growth outlook for gross domestic product (GDP) and inflation for this year. Thus, the forecast for economic growth rose by four tenths for the euro area as a whole, to 5%. For 2022, the data was revised down by one tenth, to 4.6%, while for 2023 it has remained unchanged at 2.1%.
Regarding inflation, the ECB estimated that it will close 2021 at 2.2% , three tenths above its June forecast. Likewise, for 2022 it revised the price increase by two tenths to 1.7%. The update for 2023 was one tenth, from 1.4% to 1.5%.