The euro area1 (EA13) industrial new orders index2 rose by 0.3% in August 2007 compared with July 2007. The index fell by 2.6% in July3. EU271 new orders increased by 1.0% in August 2007, after a decrease of 3.5% in July. In August 2007 compared with August 2006, industrial new orders increased by 5.1% in the euro area and by 8.2% in the EU27.
In August 2007, among the Member States for which data are available, total manufacturing working on orders rose in seventeen and fell in three. The highest increases were registered in Poland (+81.6%), Hungary (+33.3%) and Lithuania (+28.2%), and the only decreases in Denmark (-18.4%), Italy (-1.8%) and the Netherlands (-0.4%).
As reported by the Federal Statistical Office, the total price-adjusted value of orders received by building construction and civil and underground engineering enterprises in Germany decreased 4.4% in real terms in August 2007 from the same month of the previous year. In building construction demand slumped 7.6%, in civil and underground engineering it fell 1.3%. The number of employees amounted to 713,000 at the end of August 2007. That was a decrease of 28,000 (–3.8%) compared with August 2006.
"Progress on deficit cuts is modest" Draghi said during testimony in Rome's Senate. Next year's proposed budget "doesn't take advantage of an increase in tax revenue to accelerate debt reduction" and puts at risk the objective to balance the budget by 2011.
Whether or not the the recent ECB meeting provided some kind of a breather to an otherwise volatile EUR/USD currency pair is of course debatable. With the EUR/USD today trading just shy of 1.40 it could seem as if the current level will remain for the next couple of weeks. However, volatility is looming ever so much in the background threatening to take the EUR/USD up towards 1.45 which really would cause problems all over the place in the Eurozone pending of course on what happens in the US and at the FED. In fact, quibbles and niggles have already emerged as we have all observed in recent weeks and uncertainty is set to linger on the back of the ECB's 'all-doors' open approach. Clearly, only very few expect the ECB to actually raise (Bartsch' recent note is good) but what if the Fed sees room for lowering further? In short, expectations of interest differentials driven by economic reports and general indicators are the stuff to watch at the moment I think as main driving forces keeping the EUR/USD in a band between 1.40-1.45. Yet, how big of a problem is, in fact, the perky Euro? Well, we all know Monsieur Sarkozy's position and even the ever so faithful squire to the ECB Angela Merkel has also been busy on the phone with Brussels talking about what "to do". All this uncertainty and worried minds also regarding, I would reckon, the global economic environment in general was epitomized in the preparations to next week's meeting of the currency-manipulating club galore (hint; the G7). In this way, the Euro finance ministers, as reported by Bloomberg, found it mighty difficult to come to a common conclusion on the strong EUR/USD ...
European finance ministers failed to find common ground on tackling the euro's appreciation to a record against the dollar as they prepared for next week's meeting of the Group of Seven nations.
``I prefer a strong euro,'' Germany's Peer Steinbrueck told reporters at a meeting of euro-area finance ministers in Luxembourg today, a comment echoed by counterparts from the Netherlands and Austria. France's Christine Lagarde, whose government has said the European Central Bank should do more to curb the currency's gain, said she doesn't feel isolated as she arrived for the gathering.
Officials from the 13 nations that use the euro differ on how to respond to the currency's rally, which French President Nicolas Sarkozy says threatens to hurt an economy already confronted by a rise in credit costs over the past two months. While Lagarde said last week she will push for the central bank to sell euros, ECB President Jean-Claude Trichet has so far refused to signal increased concern about the currency.
Now, as should be well known for those of my readers with only the faintest idea of group dynamics, internal disagreement between members of group can be effectively solved with the invocation of a common enemy. Exhibit one for the relevance of this Freudian pocket analysis of mine is to be found in the common statement from the same meeting in Luxembourg between European finance ministers about sanctioning and essentially re- schooling the naughty boy of the class of the current market turmoil, the rating agencies. Now, one of the implicit narratives here and this should never escape our attention is also that the rating agencies have been too slow to downgrade too risky debt thus implying that the agencies' standards towards credit ratings should be tightened. I imagine that the Italian representatives have been sitting at the table with some uneasiness during this discussion. However, the real treat of the finance ministers' meeting was of course, and despite the inability to reach agreement on the EUR/USD question, the call for China to appreciate the remninbi; they even so far as to pull in the Yen too in this discussion which makes you wonder whether the finance ministers have actually been looking at what is going on in Japan. Yet, on the question of the remninbi the minister' call might be more warranted. Brad Setser has some timely analysis based on a recent article by the Economist's European correspondent Charlemagne. In the context of those famous global imbalances which is of course Brad's speciality he particularly makes one interesting point ...
China cannot run a large surplus with Europe without financing the US since its surplus with Europe reflects its decision to limit the pace of the RMB’s appreciation v the dollar, and thus to let the RMB depreciate v the euro. Nonetheless, the growing disconnect between China’s trade (increasingly with Europe) and China’s financial flows (still overwhelming toward the US) is a potential source of instability in a global financial system whose stability still hinges on large-scale Chinese financing of the US, at considerable (financial) cost to China ...
Clearly, China still ships a lot of widgets to the US but in percentage growth terms there is no doubt that the surplus with Europe has grown faster in the recent year. Another point which is clearly bound to emerge again and again with increasing force is the unwillingness of the Chinese authorities to let the remninbi appreciate even if the economy is beginning to nudge up the value chain. Or as Brad notes ...
There is another reason, beyond the RMB's depreciation, why tension is likely to rise: China is increasingly starting to produce products that compete directly with European and American products, not just with other low-wage economies. Think auto parts. Think autos for that matter. Europe makes a lot of machinery. Increasingly, so does China.
Of course, we can ask whether an appreciation of the remninbi would actually do much to reverse the flows but that is another question entirely and one which is best saved for another post.
(...) I see relatively limited room for manoeuvre. The ECB’s official short-term interest rates will probably stay at 4 per cent for a considerable period. The ECB will not start to cut interest rates until inflationary pressures subside, and until there is some hard statistical evidence of an economic downturn. At present, this evidence is confined to sentiment surveys.
A seasonally adjusted index of retail sales was at 44.1 in September, its seventh consecutive contraction, compared with 47.8 in August, according to a survey of 440 retail executives compiled for Bloomberg LP by NTC Economics Ltd. The reading has stayed below 50, the level that signals a contraction in sales, since February.
Consumer confidence in Spain declined to a record low in September after the fallout from the U.S. subprime-mortgage slump pushed up borrowing costs worldwide.
The Official Credit Institute's index of consumer sentiment dropped to 80.2 from 86.5 in August, the institute said today on its Web site. That is the lowest reading in a series that started in 2004.
The cost of inter-bank loans jumped in August after European lenders disclosed losses in the U.S. mortgage market. That pushed up payments for Spanish homeowners who have variable-rate loans tied to the 12-month interbank lending rate for the euro region.
``Spain is heading for a marked slowdown and by mid-2008 we expect it to be growing at decidedly below-trend rates,'' Dominic Bryant, an economist at BNP Paribas SA in London, said in an e-mailed note.
The 12-month Euribor rate jumped to 72 basis points above the European Central Bank's benchmark interest rate this month, twice the average spread since the debut of the euro. In Spain, 95 percent of home loans have variable interest rates.
Despite the European Central Bank’s reluctance to acknowledge the impact that a 1.43 Euro has on economy, the damage can already be seen. Earlier this week we had softer inflation and weaker confidence reports. Today German retail sales dropped 1.4 percent despite the fact that unemployment hit a 14 year low. Unsurprisingly, confidence in the region as a whole also deteriorated. The EU’s Junker has already said that the strong Euro is starting to be a great concern for the group. It seems to be only a matter of time before ECB President Trichet makes a similar comment. Why has the ECB been so stubborn? Today’s 2.1 percent flash estimate of consumer prices is a good reason. This is the first time in over a year that inflation has rose above their 2 percent target. Even though the rising Euro is suppose to reduce inflationary pressures, the even stronger rise in commodity prices is offsetting that impact. The ECB has a monetary policy meeting next week. Interest rates are not expected to be changed, but as usual keep an eye on the comments that ECB President Trichet makes at the accompanying press conference. He is definitely not expected to bring back the words strong vigilance, but at the same time, he may not be able avoid making cautionary or dovish comments particularly since many banks have been borrowing at the ECB’s penalty rate indicating that the credit markets have far from stabilized.
Between the rumbling in financial markets, a EUR/USD touching an all time high, a French president smelling blood, and what seems to be subtle yet clear signs of a turning point in the economic fundamentals it has been difficult indeed to catch a breath as a Eurozone watcher. Now of course, we are nearing the proverbial end of the line and with tomorrow's ECB meeting we should expect to get some kind of indication of the kind of strategy the ECB is playing in a context of a EUR/USD on helium, down trending economic fundamentals, and of course the lingering threat of inflation. In this sense, it has not only been my colleague Edward Hugh (and myself) who have been looking for Trichet lately in order to dissect what he in fact intends to do and say about what is happening. Also for example Morgan Stanley has (Chaney is here), albeit ever so subtly, suggested that perhaps it was due time that monetary policy makers in the Eurozone began to correct to what seems to be the inevitable fundamentals. And speaking of those fundamentals there is certainly enough bad news to pick from. In Italy retail sales slumped to a two year low a trend mirrored in Germany where retail sales also fell. More generally the general index of manufacturing growth constructed by the Royal Bank of Scotland also fell recently.
In short and if there ever was a time to pull out the proverb of being stuck between a rock and a hard place now would be as good a time as any in the context of the ECB. Of course, none of this is particularly easy; especially not since the ECB is now, as has been the case before, faced with political pressure to do something and if there is something central markets and financial markets don't like it is when politicians fiddle with their business regardless of course whether in fact the advice might be prudent or not. In my notes linked above I have dealt with this quite extensively but I can also recommend a recent piece by Wolfgang Munchau in the FT in which he examines the ECB's potential moves; and his message;
(...) I see relatively limited room for manoeuvre. The ECB’s official short-term interest rates will probably stay at 4 per cent for a considerable period. The ECB will not start to cut interest rates until inflationary pressures subside, and until there is some hard statistical evidence of an economic downturn. At present, this evidence is confined to sentiment surveys.
In principle I think it is difficult to completely disagree with this call. Clearly, given the fact that inflation is set to remain elevated in the remainder of 2007 and perhaps even beyond a sudden sea-change at the ECB in the form of targeting some kind of arbitrary EUR/USD rate would be equal to complacency and this I think will not happen. However, I do have some qualifiers which are rather important. Firstly, we need to go back for while to the time in the spring of 2006 when Japan ended ZIRP and consequently when the central banks presiding over the G3 currencies (the BOJ, the FED, and the ECB) all 'decided' that now was the time to mop up excess global liquidity. In this way and as should be rather clear at this point in time the BOJ has not exactly been able to follow through on the promises, in the US the FED got and is still sidetracked by a lingering depression in the housing market and only at the ECB have we seen hiking trip which has taken the nominal refi rate to 4.00% in the Eurozone. Secondly, we can of course add the extra spicy ingredient that the US housing market debacle has caused a severe commotion in financial markets and specifically in the very sector (housing) which has been paramount in driving growth in the current cycle both in Europe and in the US. However, and this I think is important the current slowdown of growth in the Eurozone is not caused exclusively by the turmoil in financial markets even if of course it has not exactly helped. Remember then what we talked about in the beginning of 2007 as a triple whammy to the Eurozone economy in the form of higher ECB rates in themselves, a slowing US, and fiscal tightening in key member countries.
So, in looking forward towards tomorrow's meeting we might not want to forget entirely the underlying fundamentals in play here. Yet, one thing is what I perceive to be the fundamentals and another thing entirely is how markets see and play things. In this sense tomorrow's statement from the ECB is ever so important. As such, we must remember that the story of the rise of the EUR/USD in particular as it has been told since Q3 2006 has been one of a persistent play on the closing interest differential between the Fed and the ECB as the latter continued to raise when the former chose to stand firm. This has subsequently driven out the narrative of de-coupling and whether the Eurozone and indeed the global economy could weather a US slowdown or not. Yet, this discourse has also tended to miss the overall point in the sense that while indeed the global economy is changing so that not only the US is doing the heavy pulling the real test of de-coupling would be whether the importers could turn into exporters and vice versa. Specifically in the context of the Eurozone de-coupling has even been narrated implicitly in the context of a process of rebalancing of the global macroeconomic imbalances and whether in fact we were standing before a tectonic shift in which the Dollar tumbled to reflect the large US external balance and where the Euro subsequently ascended to superiority. Of course, I have on several occasions argued why I don't think this will happen but it is a little bit difficult to deny that at this particular point in time this is where we stand.
What to expect tomorrow then?
In this way my main message to investors, analysts and of course the splendid folks at the ECB comes in the form of a question. Do we really believe that the Eurozone can de-couple? This I think is the main nut to crack here and we must remember that in the context of the current environment where the Fed is more likely to go further South than the opposite any kind of uttering of vigilance against inflation (warranted as it may be) will be interpreted as a sign that European policy makers at the ECB believe in de-coupling and that the Eurozone can tolerate tighter monetary policy in an environment where the Fed is lowering. As I have already hinted I think de-coupling is wholly unrealistic given the underlying economic fundamentals but this is nevertheless where we are at the moment.
Moving on to the more mechanical outlook on tomorrow's meeting I would indeed be surprised if inflation is not mentioned, especially since the latest flash estimate from Eurostat suggests that core inflation crept above the ECB target of 2% in August. I don't think that we will see any moves on the rate front and as such I would expect the ECB to issue a statement poiting towards stop-and-go position. In keeping with tradition in relation to regular ECB-speak I don't expect Trichet to utter the word 'vigilance' but much more interesting will be whether the ECB still sees the monetary stance to be accommodative or not? This will go along way to show how the bank views the obvious trade-off at this point between combating inflation and risking to throw the Eurozone and perhaps more specifically key member states (Italy!) into a recession by the beginning of 2008. I am also looking for notable references to the continuing difficulties with the stabilisation of the interbank market where the interest rate still remains rather far above the target at 4% and thus also a linkage between the economic outlook and the ongoing reappraisal of risk in financial markets.
In essence, it is very difficult however to gauge what in fact the ECB is going to focus on tomorrow which only makes it all the more interesting
What I would like to see but won't get? Well, I have only a couple things really. I'd wish that the ECB would consider what is going on in the CEE economies too since many of these countries are pegged both formally and effectively and given the nature of the external balance situation as well as the effect of a rising Euro this situation really is train wreck waiting to happen. Secondly, I would also like to see the ECB putting this into a global perspective of de-coupling and the imbalances instead of looking at those tedious measures of liquidity and inflation. I am not asking for complacency but I am saying that central banks in the current environment are likely to bring in more liquidity by raising rates as well as we need to ask ourselves whether in fact the current upward tendencies of inflation needs to be treated using textbook remedies.
Consumer confidence in Spain declined to a record low in September after the fallout from the U.S. subprime-mortgage slump pushed up borrowing costs worldwide.
The Official Credit Institute's index of consumer sentiment dropped to 80.2 from 86.5 in August, the institute said today on its Web site. That is the lowest reading in a series that started in 2004.
The cost of inter-bank loans jumped in August after European lenders disclosed losses in the U.S. mortgage market. That pushed up payments for Spanish homeowners who have variable-rate loans tied to the 12-month interbank lending rate for the euro region.
``Spain is heading for a marked slowdown and by mid-2008 we expect it to be growing at decidedly below-trend rates,'' Dominic Bryant, an economist at BNP Paribas SA in London, said in an e-mailed note.
The 12-month Euribor rate jumped to 72 basis points above the European Central Bank's benchmark interest rate this month, twice the average spread since the debut of the euro. In Spain, 95 percent of home loans have variable interest rates.
Well this is a rather frivolous post about a fairly serious issue. Has anyone seen Trichet? (No, not Kelly, Trichet). I imagine the financial markets would like to know what he thinks. Or rather, maybe they wouldn't, but they need to."As an export dependent nation, the Eurozone has a lot to lose if the Euro continues to rise."
The Euro made a new record high today despite larger than expected drops in German business confidence and import prices. Economic data out of Europe continues to get worse and if the Euro does not stop rising, the European Central Bank will be forced to verbally intervene in the currency. Don’t forget that the Euro topped out in late 2004 after Trichet called the moves brutal and he may have to do so again as German business fell to a 19 month low in September. This is a result of deteriorating credit conditions, a strengthening currency and tight monetary policy. As an export dependent nation, the Eurozone has a lot to lose if the Euro continues to rise. The only major benefit of a strengthening currency is lower inflationary pressures. We are already seeing the initial impact with import prices falling for the first time in nearly 2.5 years. Less inflationary pressure means less pressure on the ECB to raise interest rates. If we see a material slowdown in economic data, softer inflation may actually give the central bank the flexibility it needs to begin talking about lowering interest rates.
WIESBADEN – According to provisional results of the Federal Statistical Office, turnover in retail trade in Germanyin August 2007 was in nominal terms 1.2% and in real terms 2.2% smaller than that of the corresponding month of the previous year. The number of days open for sale was 27 in August 2007 and 27 in August 2006, too.
When adjusted for calendar and seasonal variations (CENSUS-X-12-ARIMA), the August turnover was in nominal terms 1.1% and in real terms 1.4% smaller than that of the preceding month.
Compared with the corresponding period of the previous year, retail turnover was in the first eight months 2007 in nominal terms 0.9% and in real terms 1.6% smaller than that in the first eight months of 2006.
