With the first round of the French election behind us, investors are looking to the European Central Bank's monetary policy meeting this week for any sign that the bank will rein in its expansionary stance.
They probably have little reason to fear such measures at this week's meeting, but it's a good idea to keep an eye on future developments.
The second round of the French presidential election is scheduled for May 7, and even though independent centrist Emmanuel Macron is seen as a shoo-in, stranger things (remember Brexit?) have happened. Political risk is still present, so the ECB is likely to refrain from rocking the boat before the French presidential vote runoff.
The ECB has managed to save the eurozone -- or, in the opinion of skeptics, postpone its demise -- with its extraordinary quantitative easing measures. "For all the criticism it has been drawing, QE in our view has been an unmitigated success," Gilles Moec, Europe economist at Bank of America Merrill Lynch, wrote in a report earlier this month.
The central bank managed to pull the single European currency area out of the self-destructing spiral into which it had fallen between 2010 and 2012, at the height of the debt crisis. Due to the ECB's asset purchases, public debt in the eurozone has started to fall and servicing costs are bearable for most countries.
"Reconciling economic growth with a decline in public debt is QE's most positive achievement so far, in our view," Moec said.
Low, even negative interest rates for corporate debt due to the ECB's purchases of corporate bonds have made it much easier for companies to get financing and invest.
There have been multiple signs that the eurozone's economic recovery is accelerating. The composite PMI for the eurozone hit a fresh six-year high this month, according to PMI survey data released by Markit on April 21.
More encouraging, job creation increased to the highest level in almost a decade, with companies in the eurozone expanding capacity to meet buoyant demand and on a background of widespread optimism about their outlook.
In the eurozone's biggest member, Germany, the Ifo business climate indicator came in stronger than consensus forecasts, hitting its highest level since July 2011, while French business confidence climbed to a post-crisis high in April.
Looking at investor sentiment, the latest survey by the Frankfurt-based Sentix Institute shows that small-caps are gaining in popularity, which indicates appetite for risk is on the rise. This could also serve as a clue for the ECB that, soon after the French runoff, more tapering of its monetary easing may be needed.
Markit data show that price pressures are increasing, even if consumer price inflation in the eurozone remained subdued. In April, input cost inflation rebounded, matching February's near six-year peak; there was evidence of wage pressures as well.
While all this is encouraging, it does mean that the ECB must slow down the pace at which it purchases assets even more, and it should start thinking about raising interest rates. Investors may get a clue as to how urgent the ECB thinks such steps are by listening to Mario Draghi's news conference this coming Thursday.
For a long time, Draghi has argued that politicians, not just the ECB, must do more to boost economic growth and debt sustainability in the eurozone. If this week he renews this plea and hints at the limited role central banks can play in a recovery, expect some more tapering measures to be announced at the next meeting.