Recent Economic Data Should Force ECB To Hold Rates Steady
Comfortably cushioned by recent economic data, the European Central Bank [ECB] will most likely leave its leading overnight interest rate steady at 4.25% at its governing council meeting on Thursday. ECB president Jean-Claude Trichet can be expected to point to improvements in both inflation data and M3 money supply.
According to Eurostat inflation has leveled off slightly to 3.8% in August [PDF file], after an annual CPI of 4% a month earlier. A year earlier inflation had just reached the ECB'S upper target level of 2%. M3 Money supply [PDF file], supposedly the other policy target of the ECB, has continued its retreat below the 10% mark and stood at 9.3% in August (July: 9.5%.) The ECB has a formal M3 growth target of 4.5% which it has overstepped since the introduction of the common European fiat currency in 2001.
Expect Trichet to keep the ECB's stance that inflation will moderate in the medium and long term. This is not backed up by producer price data, though. The latest PPI figures from July show an annual increase of 9% (June 8%) in the category "total industry, excluding construction." Eurostat does not publish an overall PPI figure. While there had been some hawkish tones from two ECB council members last week, rapidly worsening economic indicators will guarantee steady rates too.
Recession in Q2 2008
Eurostat published a first estimate for Q2 2008 GDP [PDF file] data that show a decline of minus 0.2% MoM. Expect the PIGS (Portugal, Italy, Greece, Spain) to take the lead in a further economic contraction.
Add in further proof from a continuing decline in retail sales, which fell 0.4% MoM in July and combine it with gas prices that did not decline equally with crude oil. Europeans have no spare cash that could boost the economy. A good part of the population, though not as many people as in the USA, are saddled with the same problem: Rising market rates for mortgages and the threat of negative home equity have yet to grow into a financial disaster rivaling the chaos in the USA.
Looking at forex markets, I don't expect American Federal Reserve Notes to rise further after the ECB's announcement. The 10% correction against the Euro is IMHO merely technical. But never forget that the whole world wants to get rid of FRNs.
Related Articles
|
Hedge Fund Jobs
Job Seekers: Search jobs by category, get job alerts by email or live feed, apply online See full list of jobs »
Employers: See all recruitment options, get applications online or by email Post a job »
Trading Center
- Free E-Newsletters
- About Seeking Alpha
- About Us
- Contact Us
- What's New
- Readers Feedback
- Advertise With Us
- Contributors
- Contribute an Article
- Feature Your Book
- Our Contributors
- Anonymous Contributions
- Dispute an Article?
- Legal
- Terms of Use
- Privacy
- Copyright
More by The Prudent Investor