Does Draghi have a case for pursuing further QE?

A constant supply of strong economic data has come out of the euro zone this month, just weeks after the European Central Bank President Mario Draghi launched of a much-anticipated bond-buying plan. So strong, in fact, that analysts are expecting that the ECB's quantitative easing program might be over sooner than originally thought.

Draghi's original plan was to maintain the asset purchase program until the end of September 2016, or until there is a "sustained adjustment in path of inflation".


Mario Draghi, president of the European Central Bank
Martin Leissl I Bloomberg via Getty Images
Mario Draghi, president of the European Central Bank

The central banker even expressed his surprise at last month's Governing Council meeting when questioned on the potential of an early exit from QE, but investors are also suggesting he may not be faced with much of a choice.

Since the March launch of the 60 billion-euro-a-month program, loans to the private sector in the euro area, a gauge of economic health, have started growing again, ECB data released this week showed.

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Retail sales in the region have seen a revival, as a dip in February was preceded by four successive monthly increases. Meanwhile German unemployment plummeted to a 24-year low and the euro zone ended four months of deflation in April, official data revealed on Thursday.

With unemployment falling and wages starting to pick up in some parts of the currency area, consumer spending will also likely rise during 2015.

This record jobless data from Europe's largest economy could put the September 2016 QE deadline into question, but not until later in the year, analysts suggest.

"Compared to a year ago, the number of persons registered as unemployed has declined by 2.9 million people, indicating that the trend in labor market improvement remains firm," said chief euro zone economist at Pantheon Economics, Claus Vistesen.

"The German unemployment rate is currently at its lowest level since 1991 raising the risk of wage pressures, which could also make life difficult for the ECB in terms of continuing QE, but this is unlikely to become a story for the market until the end of Q3 at the earliest.

Bond yields rally

Recent signs of improvement in the euro zone economy have also contributed to a sell-off in European government bonds, with investors concerned that yields are now unsustainably low, in light of the strong data.

The 10-year German Bund yield, which just two weeks ago hit an intraday record low of 0.049 percent, rallied 12 basis points on Wednesdayand then climbed another 8 points to hit 0.37 percent on Thursday. Yields in Portugal, Spain and Italy have also rallied.

"The stated intention is about another $1.2 trillion for Mario Draghi with regards to buying. The only problem for bond investors is that the amount of money in the bond market that is now yielding negative is approaching $10 trillion," said Henry Dixon, portfolio manager at GLG.

"From that perspective we can see fundamentals are improving because of employment, feeding through to inflation and then there is the grim reality of $10 trillion dollars of negative assets - there isn't enough money for those to be bought off them," he said.

Growth remains fragile?


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While data points continue to move in the right direction, global head of equities at Pimco, Virginie Maisonneuve, said the global economy is still fragile, predicting the policy will push through to its original target date -- or at least until next year.

"I think the policy was clearly stated and the probability is that it will continue until at least 2016, I think at this point September. We are at the beginning of QE. The question in terms of impact of policy is if you stop too early, it might be very difficult to re-engineer it and I think the global economy, as we have seen with the U.S. GDP yesterday is still fragile, so I think QE will continue in Europe," she told CNBC.