How do the PMI releases from today factor into their decision tomorrow?

ECB

The data from today should just reaffirm the notion that as long as economies elsewhere around the world - particularly China - continues to slow down, Europe will no doubt get caught in the crossfire. With Q2 economic growth already seen weakening considerably, the start to Q3 doesn't look like it'll get any better in the euro area.

As long as trade tensions continue to prevail and Chinese demand (imports) is seen slowing down further, the outlook for Europe will remain suspect at best. But with worries about Germany falling into a recession now gaining traction, there is good reason for the ECB to start acting as early as tomorrow to try and get ahead of the curve.

I reckon the key issue now is how prepared the ECB really is in terms of introducing stimulus measures tomorrow. There isn't any doubt that it will come but I reckon the governing council will want more time to assess and debate what are the most effective tools to implement - individually or collectively - at this point in time.

Let's look at the ECB's options:

Deposit facility rate cut

This is no doubt the first tool they'll use but I reckon they would much rather pair this with rate tiering so as to not hurt banks as much. With Spanish banks already on the brink and problems elsewhere like in Germany (Deutsche), further cuts into negative territory will certainly exacerbate concerns in the region.

Interest rate tiering

This is much of an accompaniment rather than an option in my view as it would go hand-in-hand with the deposit facility rate cut. But the question ahead of tomorrow is how prepared is the ECB to introduce this right away? I reckon they may need more time to plan it out and as such we could just see a shift in forward guidance tomorrow instead.

QE

As much as the ECB would like to avoid this, they have but little choice except to restart their bond purchase programme again. The main problem is that the central bank is approaching the purchase limit for certain countries already so it remains to be seen how effective this step would be if they cannot raise the issuer limit.

The issue with acting tomorrow is that it may be too hasty if the governing council cannot wholeheartedly agree on what "stimulus package" it wants to introduce.

Hence, a shift in forward guidance to preempt easing policies to be introduced in September - alongside new projections and gauging the Fed message next week - will give the ECB more flexibility to act.

However, the problem with waiting is that it risks the central bank falling behind the curve and the "disappointment" from not acting tomorrow may see markets throw a fit and risk the possibility of inflation expectations tumbling again.

So, should the ECB decide to wait until September, they have to consider that they have to do a whole lot more than just a 10 bps rate cut in the deposit facility. Otherwise, they would surely risk falling behind the curve as the euro area economy continues to tank with inflation expectations also not seen recovering.