Anemic EMU growth and industrial production raise risk of betting against ECB

European Central Bank (ECB) is pursuing monetary policy that is expected to keep European government yield low and Euro down against major counterparts.

Though ECB's current purchase is not an assurance that long term yields and Euro will be down, it is the most likely consequence, which can only be hindered by higher than expected demand and core inflation.

After weak inflation reading from European countries, overall growth and industrial production pose further doubts on bear's ability to push yields higher for long. Subsiding deflationary fear alone won't be sufficient enough to fuel sovereign sell off.

• Euro zone preliminary GDP grew 1% in first quarter from a year ago. Don't read too much into it as low base effect should be taken into consideration and compared to higher level of economic activity seen across Euro zone post ECB easing, this is not an unusual reading. Growth is still subdued, at 0.5% q/q.

• Industrial production might seem strong at 1.8% y/y, however dropped by -0.3% m/m. It is showing signs of economic reversal, however still anemic enough to not to go against ECB.

It is definitely welcoming that Euro zone is returning to growth and at some point bond yield is sure to move higher along with rate hike from ECB.

However betting excessive on rising yields with ECB deposit rates at -0.20% and still around $ 1 trillion assets to buy may not hold good for long. In short term though it poses some opportunities.

Why?

One should remember two key aspects.

ECB decides monetary policy for 19 countries altogether, not for some where inflation rise is higher.

Lower growth means ECB is most likely pursue its policy of easing to the very end of anticipated period.