01 September 2014 - 13:39 pm
As investors eye this Thursday’s meeting of European Central Bank policymakers for further signals that the bank has moved closer to launching a large-scale programme of bond buying, or “quantitative easing”, the latest manufacturing data out of Europe certainly won’t do much to dispel fears of a recovery in reverse.
The closely-watched manufacturing purchasing managers’ indices compiled by Markit Economics slipped to a 15th-month low in France, a 14-month low in Italy, and an 11-month low in Germany, with warning lights flashing on the sector’s health.
As for the eurozone as a whole? An unlucky 13-month low, as companies faced slower increases in both total new orders and new export business, Markit said.
The eurozone manufacturing PMI for August came in at 50.7, above the critical line that separates expansion from contraction, but still the lowest reading since July 2013. >> Read More
Mario Draghi, the European Central Bank president, has signalled he is becoming increasingly concerned about high unemployment and low inflation in the eurozone by backing calls for countries to be allowed to apply strict rules on government deficits more flexibly.
In a significant change in tone on the eurozone’s fiscal rules, Mr Draghi said countries should be encouraged to spend more within existing EU regulations that limit budget deficits to 3 per cent of gross domestic product. Germany, the eurozone’s largest and strongest economy, is one member state that could lift growth by boosting investment and cutting taxes
The remarks move the ECB much closer to the position adopted by Matteo Renzi, Italy’s prime minister, and will be welcomed in Rome and Paris.
Mr Renzi has made easing the eurozone’s fiscal restraints one of the hallmarks of his young tenure and has attracted criticism from the ECB president. >> Read More
“Disappointing” economic recoveries may point to a permanent downshift in the potential of powerhouses such as the US, Europe and China, the vice-chairman of the US Federal Reserve has warned.
Speaking on Monday to a conference in Sweden about the years since the financial crisis and Great Recession, Stanley Fischer said falling rates of productivity and labour force participation in the US among other factors may have scarred the country’s ability to generate economic growth.
The same thing may be happening for different reasons in Europe, large emerging economies such as China, and elsewhere, he said, forcing central bankers to recast their understanding of inflation, employment and growth in general.
“The global recovery has been disappointing,” Fischer said, adding that long-run annual growth in the US may now be as low as 2%, a full percentage point below the estimate of Fed policymakers as recently as 2009.
Some of that may represent temporary factors that will change if, for example, the US housing market improves. >> Read More
After a week dominated by US economic data and a Fed meeting, investors will turn their attention to central bankers abroad.
Here’s a look at what the calendar holds.
Central bank watch
This week it was the Fed – next week it’s the other big three: the European Central Bank, the Bank of England and the Bank of Japan all release updates to monetary policy.
Thursday’s decision from the ECB will be closely-watched, as investors speculate on whether President Mario Draghi will introduce quantitative easing in the battle against disinflation. The euro recently hit an 8-month low against the dollar.
The Bank of England is expected to hold benchmark rates at half a per cent, but BoE Governor Mark Carney has been increasingly vocal about the need to lift rates. The pound has gained 5.6 per cent against the euro this year.
The Bank of Japan is anticipated to hold its unprecedentedly aggressive stimulus in place. Recent stalls in inflation have convinced some analysts more is needed, but BoJ chief Haruhiko Kuroda has been more upbeat on the economy than most.
No Federal Reserve policymakers are on the speaking circuit in the coming days.
ECB’s latest quarterly bank-lending survey here
Credit conditions for eurozone companies improved for the first time since 2007, according to the European Central Bank’s quarterly lending survey, bolstering hopes for a strengthening economic recovery.
The ECB’s bank lending survey indicated that financial institutions in the common currency bloc reported a net easing of credit standards on loans to enterprises for the first time since the second quarter of 2007, and a further relaxation for household loans.
Moreover, the BLS said that banks have lowered the cost of borrowing for riskier companies, for the first time since the survey was started in 2003.
The survey asked 137 banks in the eurozone, and relate to changes in credit conditions in the second quarter and expectations of changes in the next three months.
Still, the ECB cautioned that lending conditions remained tricky for many companies.
At the same time, it has to be kept in mind that the level of credit standards is still relatively tight.
Market focus will remain split between the big events in the US (FOMC and payrolls data) as well as on the myriad of geopolitical risks. Still, it is worth highlighting that the stabilization of the Chinese economy is now being reflected in sentiment towards Chinese equity markets, with H-shares up 20% since their low, thus entering in a proverbial bull market.
Israel central bank announces its decision shortly and is expected to keep rates steady at 0.75%. With inflation easing to 0.5% y/y in June from 1.0% in May, there is little need to tighten policy. Inflation expectations also eased to 1.3% from 1.4% in May, so the central bank is likely to remain on hold for the time being.
Korea reports June current account data Tuesday. It then reports June IP Wednesday, expected to rise 0.5% y/y vs. -2.1% in May. July CPI and trade data will be reported Friday. Inflation is seen easing to 1.6% y/y from 1.7% in June. Exports are seen rising 4% y/y vs. 2.5% in June, while imports are seen rising 2% y/y vs. 4.1% in June. Overall, the picture is one of slowing growth and low price pressures. While some are looking for a BOK rate cut, we see steady rates for now.
South Africa reports money and credit data Tuesday, as well as Q2 unemployment. On Thursday, it reports June trade. Overall, the fundamental picture remains weak and the economy will face more headwinds if SARB tightening continues.
>> Read More
IMF head Christine Lagarde has warned that financial markets maybe a little too upbeat given the persistently high levels of unemployment and debt in European economies.
She also warned that continuing low inflation could undermine growth prospects in the region.
But she did say the European economy was recovering and interest rates should stay low until demand picks up.
Last month, the European Central Bank cut its main interest rate to 0.15%.
It also cut its deposit rate – the rate it pays banks to keep money on deposit – to -0.1%, becoming the first major central bank to introduce negative rates. >> Read More
One (voting) policymaker has suggested the Federal Reserve will pull the trigger on the first rise in US interest rates since the financial crisis in the early part of 2015.
Richard Fisher, the president of the Dallas Fed and a voting member on the Fed’s top panel, said on Wednesday that the world’s largest economy is recovering more quickly than the central bank had forecast.
Despite a surprise contraction in the first-quarter, the US labour market has continued to improve with the unemployment rate falling to 6.1 per cent in June.
That has intensified speculation among investors over when Fed officials will raise their key overnight borrowing rate. In a speech in Los Angeles, Mr Fisher said:
That early next year, or potentially sooner depending on the pace of economic improvement, the FOMC may well begin to raise interest rates in gradual increments, finally beginning the process of policy normalization.
Mr Fisher also took issue with the argument that a combination of tighter regulation and new capital requirements on banks will be enough to temper the potentially risk-taking by investors that low interest rates encourage. >> Read More