Today’s headlines not conducive of a rate cut.
And the only thing the ECB sees that’s keeping inflation from being a lot worse is the strong euro.
| ECB’s Liebscher Sees Risk of Wage-Price Spiral, Kurier Reports |
| German Output Unexpectedly Increases on Construction |
| French Trade Deficit Shrinks to 2.8 Billion Euros on Exports |
| Spanish House Prices Rising Slower Than Inflation |
| ECB’s Quaden Calls Belgian Inflation `Rather Bad’ |
| German BDB Banking Association Says Economy Is `Robust’ |
| ECB’s Constancio Says Stronger Euro Helping to Curb Inflation |
So far, with inflation running well above target the ECB has decided it can’t afford to deliberately weaken the euro even with exporters screaming.
Europe Inflation Accelerates to 3.5%, Sentiment Drops
By Fergal O’Brien
(Bloomberg) European inflation accelerated to the fastest pace in almost 16 years, making it harder for the European Central Bank to cut interest rates as a global credit squeeze saps confidence among executives and consumers.
Consumer-price inflation in the euro area accelerated to 3.5 percent this month, the highest rate since June 1992, the European Union’s statistics office in Luxembourg said today. The euro rose after the publication of the figure, which was higher than economists had forecast. A separate report showed consumer and business confidence declined in March.
And that’s with a strong euro keeping import prices lower than otherwise.
“This will surely dash any residual hopes of a near-term rate cut,” said Dario Perkins, an economist at ABN Amro in London. “With inflation this high, it would take a major deterioration in the real economy to prompt the ECB to lower interest rates this year.”
Yes.
March inflation was faster than the 3.3 percent median forecast of 36 economists in a Bloomberg News survey and the acceleration pushed the rate further above the ECB’s 2 percent ceiling, a target it hasn’t achieved in the last eight years.
The euro rose as high as $1.5834 after the inflation report and was up 0.1 percent to $1.5807 as of 12:15 p.m. in London.
High inflation = Strong currency???
That’s the current paradigm as markets trade as if interest rates are more important for currency pricing rather than purchasing power parity.
Still, there are signs the euro-area economy is so far weathering the U.S.-led slowdown. German and French business confidence climbed in March and unemployment in the euro region was a record low 7.1 percent in January.
Low unemployment scares the ECB a lot.
If the euro hadn’t been as strong as it is, inflation would be that much higher over there.
Highlights:
| European Inflation, Labor-Cost Growth Accelerate |
| European govt bonds lower after euro zone inflation hits new record |
| German Inflation Stays Above ECB Limit for 12th Month |
Countercyclical budget deficit growth could bring on a national credit crisis in the Eurozone that makes the current US situation look like child’s play.
This is their vulnerability that came with the Maastricht Treaty and has yet to be tested.
Italy Halves Growth Forecast, Sees Deficit Rising
by Flavia Krause-Jackson
(Bloomberg) The Italian government cut its 2008 economic growth forecast by more than half, as slumping confidence and rising prices threaten to brake expansion to the slowest among the 15 nations that share the euro.
The $2.2 trillion economy, Europe’s fourth-biggest, will grow 0.6 percent this year, the Rome-based Finance Ministry said today in a statement. That’s down from a forecast of 1.5 percent in December and would be the weakest rate of growth since 2005.
Italy may be the first and only country in the euro region to enter a recession this year and may have contracted in the fourth quarter, according to Morgan Stanley economist Vladimir Pillonca. Growth is slowing just as rising food and energy prices are fueling inflation and sapping consumer and business confidence.
“If you add to the mix an international situation that is now weaker than expected, this creates a real mess in a country where productivity was already declining,” said Luigi Speranza, an economist at NP Paribas SA in London.
Italy’s budget deficit will rise to 2.4 percent of gross domestic product, more than the 2.2 percent formerly predicted though still under the European Union ceiling of 3 percent. The shortfall narrowed last year to 1.9 percent of gross domestic product, the least since 2000, the Rome-based national statistics office said Feb. 29. That’s about half the 2006 deficit of 3.4 percent.
European News Highlights:
| ECB’s Weber Sees `Little’ Room to Cut Interest Rates |
rising MNOG (minimum noninflationary output gap) as inflation rises at current levels of GDP. (see below.)
| ECB’s Noyer Says Globalization Has `Ceased’ to Curb Inflation |
import prices are rising there even with the strong euro, implying if the euro wasn’t as strong import prices would be that much higher.
| Euro Strength Reduces ECB’s Surplus |
US beggar thy neighbor policy is robbing demand from the eurozone
| German Industrial Output Rises, Led by Construction |
| Italian Light Commercial Vehicle Sales Climb 14% in February |
If GDP holds up with inflation this high and rising, the ECB then has to engineer a larger output gap.
ECB’s Weber Sees `Little’ Room to Cut Interest Rates
by Simone Meier and Gabi Thesing
(Bloomberg) European Central Bank council member Axel Weber said the bank has little room to lower interest rates with the economy operating near full capacity and oil prices at a record.
“The output gap is such that it doesn’t give me a lot of comfort that it will lead to a strong disinflationary effect in the period to come,” Weber told reporters in Oslo today. Coupled with external price shocks such as surging oil and food prices, “there is very little room to maneuver.”
The ECB yesterday kept its main lending rate at a six-year high of 4 percent to curb inflation even as the euro’s appreciation and slower U.S. expansion threaten to curb economic growth. Weber said today that there’s an “unusual amount of uncertainty” on both the outlook for growth and inflation.
“The current policy stance in the euro area has to be judged as contributing to achieving our medium-term objective of price stability,” Weber said. “Weaker growth prospects do not pose sufficient reason to expect a damping of inflationary pressures in the foreseeable future.”
The ECB yesterday revised up its inflation forecast for this year to about 2.9 percent, which would be the highest annual average rate since 1993, according to International Monetary Fund figures. The bank also predicted inflation would average about 2.1 percent in 2009, breaching its 2 percent limit for a 10th year.
“Due to increases in unit wage costs, core inflation rates are projected to equally exceed the 2 percent margin over the course of 2008,” Weber, who is also president of Germany’s Bundesbank, said. “And even taking into account a forecast horizon beyond 2008 gives no sign for relief.”
Weber said the bank will “do what is necessary” to quell inflation risks.
Economic growth in the 15-nation euro region will show a “gradual recovery toward potential rates” of around 2 percent in the second half of 2008, he said.
And, of course, that’s a bad thing when inflation is too high to begin with.
Should the Fed turn it’s attention to inflation, it will find itself way behind that curve.
The US cpi is about 100 bp higher than the eurozone cpi’s, including the UK where rates are north of 5%.
With US inflation where it is, the mainstream calculation for the appropriate ff rate is probably north of 7%.
The way the mainstream now sees it, the more the Fed cuts to get ahead of the ‘economy curve’ (whatever that is), the further it gets behind the inflation curve.
At this point if may not take much in the way of economic ‘improvement’ to redirect the Fed’s attention. A sign of a housing turn might be sufficient.
And with a general inflation underway, housing prices will go up as well, regardless of weakness, due to cost pressures, much like the late 70’s.
Highlights:
| European Government Bonds Fall as German Producer Prices Surge |
| ECB’s Garganas Says There’s `Intense Concern’ About Inflation |
| Spain’s Exports Grew as Economy Accelerated in Fourth Quarter |
This is the mainstream approach to negative supply shocks:
“Don’t let relative value stories turn into inflation stories.” (as the Fed used to say)
And, they say, if you wait for the economy to get strong bringing the higher rates of inflation down gets more than that much harder.
STOCKHOLM, Sweden – Sweden’s central bank on Wednesday made a surprise increase in its key interest rate by a quarter of a percentage point to 4.25 percent in a move to keep inflation in check.
The hike surprised many market watchers who had expected the Riksbank to either cut its benchmark repo rate or keep it unchanged at 4 percent.
“There were expectations on a reduction. It was a surprising increase,” Handelsbanken analyst Marcus Hallberg was quoted as saying by Swedish news agency TT.
The bank said it expects the interest rate to stay “roughly” at the same level for the rest of the year. But in Wednesday’s announcement, the bank warned that “there is still considerable uncertainty regarding the economic outlook and inflation prospects,” and cautioned that while it currently expects the repo rate to stay near the new level, “there is considerable uncertainty in this assessment.”
The bank’s further course would depend on how economic developments abroad affect Sweden’s economic activity and inflation, it said.
Although economic activity remains strong, the bank said it deemed inflation to be high, and the rate rise will help to bring inflation back toward the target of 2 percent “a couple of years ahead.”
Inflation, or consumer price index, has been rising steadily in recent years and is now at 3.5 percent.
The bank said that “gross domestic product growth will slow down over the year and the increase in employment will slacken. Resource utilization in the economy will nevertheless be higher than normal.”
Inflation has been pushed up mainly by higher food and energy prices as well as cost pressures.
The bank said the continued global market financial turmoil and the unrest in the U.S., has led to “great uncertainty” and that recent developments in the financial markets mean that “the risk of weaker growth in the world economy has increased.”
Davide Stroppa, an economist at Bayerische Hypo- und Vereinsbank AG, described the raise as a “shock” in a research note.
“As we see it, with today’s move, the Riksbank exploited the window opportunity to deliver a hike before it will be too late and the dilemma of risks of a slower (although still quite respectable) growth and higher inflation would be solved in favor of the former.”
Sweden’s repo rate was last raised in October, by a quarter of a percentage point to 4 percent.
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(an interoffice email)
I’m thinking they had to do something about the euro.
the eurozone exporters can be very convincing
warren
On Feb 7, 2008 10:41 AM, Karim wrote:
>
>
>
> Is taking hikes off the table, so:
>
> 1) No mention of acting ‘pre-emptively’
>
> 2) No one voted to hike (or cut) at meeting
>
> 3) Trichet: “I never subscribed to theory of decoupling’
>
> 4) Downside risks to growth now ‘confirmed’
>
>
>
> All the usual references to preventing 2nd round effects not new, 1-4 above
> is.
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Please excuse the mix of Bloomberg and Valance graphs.
Comments welcome.
Went blurry eyed trying to organize it all.
Markets reacted strongly to Friday’s -17,000 non-farm payroll number. Several sources called it the first negative payroll number in 4 years.
How quickly they forget the first negative number was the initial August number of
-4,000 that contributed heavily to the FOMC’s first rate cut. That number was revised upward the next month by close to 100,000 jobs and, if initially reported ‘correctly,’ might have changed the size of that rate cut. And, like the recent January number, the initial August number had a negative number for government workers that was subsequently revised upward and accounted for the majority of the revision.
Likewise, December’s initial report was weak, and the Fed reacted and markets traded accordingly, only to have it revised up to reasonably respectable 80,000 new jobs.
Clearly the initial numbers are far from reliable, and the initial revision is a far better indicator of the labor market conditions, with an eye out for second, third, and benchmark revisions that have also been meaningful.
So if the January number is completely disregarded and only the numbers revised at least once are considered, non-farm payrolls have been moderating but are far from levels that would indicate recession. In fact, non-farm payrolls have been reasonably steady for the second half of 07 where GDP averaged over 3% annualized, with upward revisions very possible as well, but that’s another story.
The ADP report of its near 400,000 payrolls has been a better indicator of the revised payroll numbers than of the initial payroll report. It’s also been showing the same gradual decline over the last few years as the (revised) payroll numbers due to the economy ‘using up slack’ and nearing full employment. But is has not dipped into negative territory or signaled a recession yet, further supporting the possibility of the Jan payroll number being revised up next month.
The unemployment numbers and household job growth numbers come from the household surveys, and the December jump in unemployment to 5% from 4.7% perhaps contributed even more heavily to the Fed’s latest decision to cut the fed funds rate a total of 1.25%. These are monthly survey numbers, so they are not subject to revision. The recent large fluctuations to both the upside and downside for the last 8 months are, however, on average, consistent with the above payroll reports of numbers revised at least once.
The labor force participation rate may also be an indicator of a reasonably firm labor market. At any point in time there are substantial numbers of people not actively seeking work and therefore technically not part of the labor force, but when firms make it know that they need more help some of these people are drawn back into the labor market and actively seek work. After what looks like a modest drop in the first half of 07 it seems to have recovered.
Additionally, the Fed anticipates this series to decline over time due to US demographics. That assumption would mean that over time lower payroll growth would be needed to sustain full employment, which is also consistent with what we saw for 07. In fact, Fed members (unofficially) consider a 4.75% unemployment rate to be ‘full employment.’ And anything below that risks elevating inflation expectations.
In fact, through August, the Fed’s policy was to allow unemployment to drift up to 5% to keep sufficient slack in the labor markets to keep the various inflation measures within its comfort zones.
Initial unemployment claims are also not yet indicating recession, but instead staying in a range expected with a mature economy that has reached full employment and has leveled off at what the Fed considers full employment levels.
Continuing claims have moved up some, but not to anything near recession levels, and are now hovering around a level approximately consistent with the Fed’s perceived full employment level of about a 4.75% rate of unemployment.
While moderating from previous levels of growth, taken together, the ISM numbers are hovering around 50. This too is consistent with an unemployment level just above the Fed’s 4.75% full employment estimate.
Duration of unemployment also continues to trade within a range consistent with current levels of unemployment.
This survey as well as the ‘jobs plentiful’ survey both continue to move within a narrow range over the last 18 months.
Real GDP also looks very firm. Since weak q4’s have been followed by stronger q1’s.
This year inventories were depleted by 1.4% in q4 and replenishing inventories from current very low levels should lend support to q1 growth. Low inventories are not indicative of a recession about to happen.
Personal income and spending are also consistent with current levels of employment and don’t yet show any sign of recession.
Durable goods are also not showing signs of recession yet.
Both the non defense durable goods and the government spending charts seem to indicate government spending, including defense, may be accelerating back to previous levels. It is not impossible that some 07 govt. spending got moved forward and is beginning to kick in. Deficit spending is projected to increase by $25 billion in q1 due to increased govt. spending.
Additionally the proposed fiscal package scheduled for implementation in May could add a further 1% to q3 GDP.
Housing remains weak, and continues to fall and subtract from GDP. And the risk that a wealth effect from falling home values could cut into consumer spending is pervasive.
Absolute inventories of new and existing homes have been going down for several months, even as the supply measure in months of sales kept falling due to falling monthly sales rates.
An increase in the rate of sales from current low levels will quickly reduce the months of inventory.
Sales may have bottomed in October/November.
Lower prices, lower interest rates, and higher incomes all coming together.
This continues its modest, multi year decline. The Fed measures housing costs by calculating owner’s equivalent rent.
Refinance applications have spiked up indicating this market is functioning and credit worthy borrowers are able to obtain financing on favorable terms.
Purchase applications are also not showing signs of recession, assuming last week’s drop is not sustained.
Looks like the commercial paper market may be on the mend. Watch for bank loans losing steam as cp regains market share.
The big story for the US economy has been the rapidly growing exports. The additional GDP attributable to rising exports has so far more than offset the reduced contribution of housing.
Prices have been rising at rates not seen since the great inflation of the 70’s began to wind down in the early 80’s, and the above numbers look a lot like those of the early 70’s. Additionally, it all started then and now with oil and other commodities trending sharply higher, and headline inflation indicators turning north for two or so years before core indicators followed.
The drop in prices the above charts show for the second half of 06 can be attributed to Goldman Sachs’ net reduction of the gasoline and crude oil weighting in its commodity index in Aug 06. This triggered substantial liquidations of long positions held by pension funds and other investors who were replicating the Goldman index for their investors, as well as the Goldman commodity fund itself selling gasoline and crude oil futures to reallocate to the new index. This had about run its course by year end, when at year end Goldman, and this time AIG as well, effectively further reduced the crude oil weighting in their indexes. This triggered yet another liquidation of positions. After prices bottomed and began rising again it was announced that control of the index had passed to S and P to avoid related party issues and conflicts of interest, and crude, gasoline, and other commodities resumed their former upward trends. Most have more than recovered and gone on to new highs.
Crude oil prices continue under the direct control of the Saudis, and probably the Russians as well. Saudis have been acting as ‘swing producer’ for several years, and Russia has now consolidated pricing so it can do the same. As any monopolist at the margin must do, they set price and then supply the quantity demanded at that price.
And as the Saudis have been posting ever higher prices (since the debacle of the second half of 06 previously described) the amount demanded at the higher prices has continued to increase. Last week OPEC announced that Saudi production was up to 9.2 million bpd, for example. Monthly production numbers are due out next week.
Meanwhile, the Fed has been aggressively cutting rates as what can most kindly be described as insurance against a recession. This has had an extreme effect on market expectations, as the 10 year tips are now discounting record low average ‘real rates’ by the Fed over the next 10 years, even as inflation continues to increase.
Equities remain at levels that look like very good value for long term investors.
The US trade balance is a function of the desire of non residents to accumulate $US financial assets.
That desire had been increasing for a long time, as evidenced by the growing US trade deficit. And foreign Central Banks were the largest entities desiring to accumulate $US financial assets, thereby supporting their domestic export industries. Additionally, there is evidence US pension funds have been diversifying out of $US financial assets as well into both passive commodity strategies and (unhedged) foreign equities.
Three things have altered the rest of world (and our own pension fund) desire to accumulate $US financial assets, which are also evidence of a ‘weak dollar’ US policy:
This has triggered a general desire of non residents to decrease certain holding of $US financial assets. At the macro level, the way this happens is non residents first try to sell the $US in the market place, driving the price of the $US down. This continues until it reaches a level where the buyers of the $US are buying the currency because prices in the US are now low enough for them to buy US exports of goods and services, as well as US non financial assets including real estate.
Therefore I expect exports to continue to accelerate until non resident holdings of $US financial assets reach desired levels.
This is what export economies look like. Employment is high, but domestic prices are high enough so that domestic compensation (including government consumption) isn’t enough to buy the output, with the rest of the output being exported.
We are seeing that in the US. Domestic real consumption is moderating due to high energy and prices of other imports, while exports take up the slack in demand and support what the Fed considers near full employment levels.
The Eurozone is seeing much the same thing. Declining budget deficits contribute to relatively low domestic demand and domestic consumption, ..
..while high inflation indicators persist even as growth slows.
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