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Investors once again fled for so-called "safe havens" on Thursday morning amid growing fears of stagnation and some reassuring comments from European Central Bank (ECB) officials that the bank is ready to act.
An ECB survey of professional forecasters jolted global asset markets as the economists cut their outlook for inflation in the euro zone region over the next few years.
The survey now predicts that consumer prices could remain at 0.9 percent in 2014, down from a first-quarter forecast of 1.1 percent. Estimates for next year and for 2016 also saw moderate downgrades and their longer term view of consumer prices remained firmly below the central bank's targets.
Ken Wattret, the co-head of European & CEEMEA market economics at BNP Paribas said that while the new figures are not exactly collapsing, they are a good reason for the ECB to "continue to fret about losing credibility" when it comes to achieving its inflation targets.
European stock markets fell back on the news and bond yields - in the both the euro bloc and in the U.S. - shot lower as investors shunned riskier assets. The interest rate on the 10-year U.S. Treasury sank to 2.5320 percent after trading at 2.5605 percent. German bund yields lost even more with the 10-year falling by 20 basis points and the euro also fell to an 11-week low against the dollar.
All this came amid some lackluster growth data for the first quarter from the Netherlands, Italy, Portugal and France. On Thursday morning, the flash estimate figure for euro zone gross domestic product (GDP) came in at 0.2 percent (quarter-on-quarter) versus a Reuters forecast of 0.4 percent. A final reading of inflation - one of the key economic gauges used by the ECB to measure the strength of the region's economy - held steady at 0.7 percent on a yearly basis.
ECB officials have tried to spread calming words across the globe as world asset markets are becoming increasingly focused on what its next move will be. David Tepper, a closely-watched U.S. hedge fund manager told an audience at SkyBridge Capital's SALT 2014 conference in Las Vegas on Wednesday that he has concerns about a deflationary environment and a European Central Bank that badly needs to ease monetary policy.
"The ECB—they better ease in June," Tepper said. "I don't know how far behind the curve, but I think they're really, really far behind the curve."
ECB Vice President Vitor Constancio said Thursday that the central bank is ready to act if needed but said there were no distinct signs of deflation in the euro bloc. Expectations are growing that the ECB could act at its next Governing Council meeting in June. Among the policy actions available to the bank are a further cut to interest rates, some targeted measures aimed at boosting lending to small- and mid-sized firms or even a Federal Reserve-style quantitative easing program. For many market watchers, the fears are that low inflation could lead to stagnation over the longer term or even a fall into deflation - when consumer prices start to fall as consumers hold off purchases in the hope of further price drops.
Germany - which is traditionally seen as the most resistant to ultra-easy policy due to inflation fears - seems to have warmed slightly to the idea. Bundesbank President Jens Weidmann said Wednesday evening that the German central bank is ready to back ECB policy action if needed, according to Reuters, but added that not every measure under discussion is suitable.