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Apr-26-2008European Money Supply Shows Signs of Slowing(topic overview)
CONTENTS:
- HONG KONG (Thomson Financial) - The U.S. dollar was little changed in afternoon trade in Asia on Wednesday as investors were sidelined ahead of the Federal Open Market Committee (FOMC) meeting next week. (More...)
- Economists said the ECB could not take the data at face value, however, due to distortion from financial market turmoil. (More...)
- The ECB has held rates for the last 10 months despite moves by the U.S. Federal Reserve, the Bank of Canada and the Bank of England to loosen policy amid continued market tensions. (More...)
- Pis' income is nearly one-third higher than the average monthly pension of 8,885 crowns, or €275, a sum that is still small in a country that has moved from one of the most economically dour in the region just a few years ago to what the Economist Intelligence Unit has called a "shining star." (More...)
- "The market consensus is that the only way for interest rates to go is up because the main focus is on long term inflation worries in Europe," said Ryohei Muramatsu, manager of Commerzbank Group Treasury Asia in Tokyo. (More...)
- The bank is worried that surging energy and food prices could lead to a wage-price spiral. (More...)
- Noyer addressed concerns that the ECB would find it difficult to handle the collapse of a large bank with cross- border operations, the newspaper said. (More...)
- Analysts are watching the data for evidence that bank lending is beginning to dry up, amid tightening financing conditions stemming from financial market turbulence and risk repricing. (More...)
- The following day's docket holds the greatest potential for a fundamentally-driven run in the majors. (More...)
- This is much like in the U.S. where the Fed is more engaged in fighting a slowdown than in taming inflation. (More...)
- Among the Central and Eastern European states, only Slovenia has met the criteria and switched to the euro in 2007. (More...)
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HONG KONG (Thomson Financial) - The U.S. dollar was little changed in afternoon trade in Asia on Wednesday as investors were sidelined ahead of the Federal Open Market Committee (FOMC) meeting next week. The Federal Reserve's policymakers meet on April 30 to discuss interest rates and so far most analysts are predicting the FOMC will lower rates by at least a quarter of a percentage point, which would the smallest rate cut this year. The dollar weakened to its lowest level against the euro, touching $1.6020 overnight, as officials from the European Central Bank (ECB) continued to suggest interest rates this year in the 15-member euro zone area may either stay unchanged or move up from a six-year high of 4 percent due to the spiraling inflation rate. [1] Higher rates are one factor behind the strong euro. It said it understood that the ECB was keen to limit inflation but "in current circumstances the ECB should not lose sight of important downside risks to growth and exchange-rate developments." It warned of the dangers in different borrowing costs between the euro zone and other regions such as the U.S. and Britain where central banks have moved to cut rates to urge wary banks to lend more money in the wake of the subprime credit crisis. BusinessEurope predicts that the euro economy will grow by 1.7 percent this year more optimistic than the International Monetary Funds forecast of 1.4 percent. It expects European consumers to start spending again later this year as inflation cools down from record levels. The European Commission will likely next week lower its own growth figure, acknowledging that Europes recent boom will start to brake on high energy costs that fuel record-level inflation, tight credit conditions triggered by a banking crisis and a U.S. slowdown.[2]
Closer home, the Reserve Bank of India (RBI) is perceived as one of the most conservative central banks in the world. It has much in common with the ultra-accommodative Fed. Both have a dual mandate ''' growth and price stability ''' unlike ECB that targets only inflation. With priorities like those of the Fed and a cautionary approach like that of ECB, how will RBI chart its course? Election or no election, price stability is important, especially when inflation is at a three-year high of more than 7%. This will be an over-arching feature when governor Y V Reddy unveils the annual monetary policy on April 29, amidst less rosy GDP forecasts. Around the same time next week, half way across the world, the U.S. Fed is expected to slash its key rate by 25 basis points to 2% even as a further rate cut could spur inflation. Experts hope this would then ring in a pause for rate cuts by the Fed. RBI has no explicit mandate for formal inflation-targeting.[3] FRANKFURT (Thomson Financial) - European Central Bank President Jean-Claude Trichet said there have recently been'sharp fluctuations' in exchange rates and the ECB is concerned about their possible implication for financial and economic stability. Speaking to reporters on the sidelines of an ECB conference, Trichet said: 'More than ever, what is said by the U.S. authorities at the level of President, Minister of Finance, and (U.S Federal Reserve Chairman) Ben Bernanke on the fact that a strong dollar is in the interest of the united states, is very important,' he added. Trichet also said that the ECB's current monetary policy stance 'will contribute to achieving our objectives, which is price stability' and that this will help 'anchor inflation expectations'.[4] FRANKFURT (Thomson Financial) - European Central Bank executive board member Juergen Stark said the ECB's 'current monetary policy stance will contribute to achieve our medium-term objective' of ensuring price stability. Speaking to reporters on the sidelines of the ECB's fourth conference on statistics, Stark said that since 2005, the ECB had raised rates by 200 basis points and that these interest rates are still working their way through the economy. 'This is working through,' Stark said, adding that the current level of interest rates will have an impact in the 'quarters to come', without providing further detail.[5]
Even some of the much richer original euro members are struggling to meet inflation and debt targets. Nations that adopt the currency also effectively cede control over monetary policy to the Frankfurt-based European Central Bank, which means they give up the power to spur growth during downturns, for example by slashing interest rates, or to control inflation by raising them.[6]
In March, euro-zone inflation hit 3.6% on year. The ECB employs both economic and monetary analysis to determine policy. Market participants believe the ECB will keep interest rates on hold at its May 8 policy meeting in Athens. Unlike other central banks, the ECB hasn't cut interest rates in the wake of global financial market turmoil, and has kept its policy rate at 4.00% since June 2007.[7] FRANKFURT/PARIS (Reuters) - The European Central Bank is prepared to raise interest rates if needed to bring inflation under control, policymakers said on Tuesday. French central bank Governor Christian Noyer said the ECB could adjust rates to make sure inflation fell below 2 percent in 2009, while his Luxembourg colleague Yves Mersch said central bankers had to consider every month whether a hike was warranted. Their comments are in line with the tough stance against record high inflation expressed by others such as Germany's Axel Weber and Austria's Klaus Liebscher, which is prompting some analysts to move away from earlier expectations of aggressive rate cuts this year. Greece's Nicholas Garganas said it was impossible to predict future rate moves but said they would depend on inflation, a point also stressed by Noyer.[8] The ECB's inflation rate stood at 3.6 percent in the year to March, way ahead of the central bank's target of around 2 percent. That stoked market talk that the ECB's next interest rate move may actually be up, prompting a sharp retreat in European issues, particularly at the front- end. Noyer told the Wall Street Journal that his comment was taken out of context, with the newspaper reporting him as saying 'I would never engage in a discussion about the future path of interest rates, simply because nobody knows. In the UK, gilts were also up, but by much smaller margins after news that retail sales fell at their fastest pace in more than a year in March.[9]
The latest figures suggest that euro zone inflation is set to ease in the coming months. Lobby groups and politicians have urged the ECB to cut its short-term interest rate of 4.0% in order to stimulate ailing economic growth, but the Frankfurt-based central bank continues to see the fight against inflation as its biggest battle.[10] "One of the significant drivers today, and an underlying theme in recent dollar trade, is that the market expectations are really starting to shift away from further rate cuts from the Fed and we're seeing more concern about inflation in the euro zone," said David Solin, a partner at Foreign Exchange Analytics in Essex, Conn. The dollar has been weighed down by a combination of gloomy U.S. economic data, rate cuts by the Federal Reserve and high European inflation, which has kept the ECB from reducing its own rates. Lower interest rates can weigh on a nation's currency as traders transfer funds to places where they can earn better returns, while higher rates are used to curb inflation.[11] High oil and food prices pushed inflation to a record 3.6 percent in March for the 15 countries that share the euro. That led analysts to conclude the main ECB interest rate would stay on hold at 4.0 percent even though the U.S. Federal Reserve and the Bank of England have cut their own rates to ward off an economic slump.[12]
ECB governers are thus beginning to see signs that eurozone inflation which hit a record 3.6 percent in March, might start to ease lower in the coming months. Eurozone companies and some politicians have pressed the bank to trim its benchmark short-term interest rate of 4.0 percent to encourage slumping economic growth, but the bank is mandated to focus first and foremost on fighting inflation.[13]
In remarks on the most recent Bank of England vote to lower interest rates, Jonathan Loynes of Capital Economics noted that some policymakers in Britain were "prepared to think more about the implications of the weakening activity outlook for inflation further ahead." Central banks typically expect monetary policy decisions to have their full effect about 12 to 18 months after they are announced. Developments such as recent German wage raises could push eurozone inflation upwards in the coming months, and the bottom line, said Holger Schmieding at Bank of America, was that "many at the ECB are very concerned about their inflation-fighting credentials."[12] Besides growing evidence of a sharp U.S. slowdown, protracted financial market turmoil, rising commodity prices and a weakening dollar, the report said European companies also face home-grown dangers, notably high inflation. BusinessEurope said the business community broadly endorsed the European Central Bank (ECB)'s monetary policy to date and in particular its handling of the financial market crisis, urging EU governments to remain committed to fiscal discipline at the current difficulties. It called for responsible wage demands by trade unions in order to avoid second-round effects of inflation.[14] MILAN (Thomson Financial) - The European Central Bank cannot ignore that inflation has reached 'intolerable levels' and any political interference in the bank's policy is unacceptable, said board member Lorenzo Bini Smaghi in an interview with the weekly Il Mondo. He added that there is a general consensus to fend off inflation, noting the last meeting of European Union finance ministers praised the ECB's action and urged EU governments to help the central bank fight rising prices. He added that current currency fluctuations are worrying because of their potential impact on the stability of economic and financial systems. The concern is not just for the euro-zone but also, and mainly, for the United States, he said.[15]
A member of the European Central Bank's rate-setting council, Christian Noyer who heads the Bank of France, backtracked in press remarks on Wednesday from implying that eurozone rates might rise to contain inflation. "ECB's Noyer is quoted today, saying that his comments yesterday, which the markets took as a hint that the ECB could be leaning towards raising rates, had been over-interpreted," said ABN Amro analyst Melinda Smith. "This could dampen the upward move of the euro, but given the ECB's hawkish stance and unwillingness to cut rates, plus the dollar's weakness, there could be more upside potential for the pair."[16] Demand for the European currency also fell after comments by European Central Bank Governing Council member Christian Noyer dampened speculation of further rate increases by the bank. The RBC/NTC Eurozone Purchasing Managers Index for manufacturing dropped to 50.8 in April, its lowest in nearly three years. German manufacturing activity also fell, although both German and euro zone readings for the service economy rose.[17] PARIS (Thomson Financial) - European Central Bank Governing Council member Christian Noyer said the ECB and the banking sector are examining the reasons for a rise in certain lending rates within the euro zone.[18]
The euro/yen at 164.66, the dollar at 103.73. Today the governor of the Bank of France, Christian Noyer, changed course, after yesterday his remarks on a possible raise of European interest rates by the ECB drove the dollar to over 1.60 dollars. In an interview with the Wall Street Journal Noyer explained that the markets have misunderstood his words, specifying that the European Central Bank could go both ways, raising or lowering interest rates, after which the euro started falling.[19] Taking a similar line on Tuesday, another member of the governing council of the ECB, Yves Mersch who heads the central bank of Luxembourg, had said that eurozone rates were unlikely to fall in the foreseeable future. The ECB has held its key short-term interest rate at 4.0 percent since June, despite concern in some quarters that this rate, compared with 2.25 percent in the United States, is an important factor in the rise of the euro against the dollar which is squeezing some exporters.[16] BusinessEurope said oil prices have increased by 75 percent over the last 12 months in dollar terms but only by 50 percent in euro prices. The group said some two-thirds of its national business association members believe the European Central Bank has been too restrictive in keeping interest rates on hold at 4 percent since last June.[2] LONDON, April 23 (Reuters) - The euro retreated from a record high set the previous session versus the dollar on Wednesday after a European Central Bank policymaker toned down earlier hawkish comments on interest rates.[20]
The 15-nation currency bought $1.5896 in late New York trading, below the high of $1.6018 it reached Tuesday after a pair of European Central Bank governors suggested that interest rates would go higher if inflation was not stemmed.[11] Demand for the European currency slid further after comments by a member of European Central Bank Governing Council, Christian Noyer, dampened speculation of further interest rate increases by the bank.[21] A member of the European Central Bank's governing council, French central bank head Christian Noyer, told the Wall Street Journal Europe Wednesday that commodity and energy prices could fall if economic activity slumped more than expected. His remark implied that that might justify an easing of rates. If an International Monetary Fund forecast for weaker growth was accurate, "then of course the downward pressure on these types of goods might be strong and we may have a totally different path of inflation," Noyer said.[12] In February, the number of approvals totaled 43,147. In Sweden, the Executive Board of the Riksbank decided to leave its repo rate unchanged at 4.25%. The Riksbank raised its 2008 GDP growth outlook to 2.6% from 2.4% and lowered 2009 view to 1.8% from 2%. Elsewhere, the Norwegian central bank or the Norges Bank raised its key policy rate by 25 basis points to 5.5% citing rising inflation, continuing turbulence in financial markets and an expected global growth slowdown.[22] Many traders believe that the energy and food price inflation that caused the increase in CPI is exogenous and will not result in higher interest rates from Bank of Japan. The BoJ'''s Policy Board convenes next Wednesday and is expected to keep the overnight call rate unchanged at 0.50%, upgrade its inflation forecast, and downgrade its forecast for GDP growth for the fiscal year to March 2009.[23] "At present it is essential that inflation returns to levels consistent with price stability," the report said. In an effort to fight inflation, the ECB left its benchmark interest rate unchanged for months despite the need to stimulate a slowing economy with rate cut. BusinessEurope also said the EU must continue to forcefully engage its global partners to ensure sustainable exchange rate patterns and to avoid further deepening of the credit market crisis. "European companies are resilient and they continue to invest, export and create jobs despite all the uncertainties. We now count on governments to create the right conditions that will support this confidence and hence growth in the years ahead," said Philippe de Buck, Secretary General of BusinessEurope.[14] The ECB has kept interest rates at 4.0 percent since June last year, before the spread of credit turmoil to Europe, after raising rates progressively from 2 percent since December 2005. ECB Executive Board member Juergen Stark said on Thursday that these rate rises still had not fully fed through into the euro zone economy, but he had seen an effect on M1 narrow money supply growth.[24]
Policymaker Christian Noyer offered the same inflation sentiment. From the economic docket, both the German Import Price Index and Euro Zone money supply numbers for March cooled. The German inflation report was still near its 19-month high, but marked a notable slip. The money supply number on the other hand slipped to a 12-month low 10.3 percent pace of annualized growth; and considering ECB President Trichet's constant mention of "vigorous" M3 growth, this makes an interesting point.[25] FRANKFURT: Euro zone M3 money supply growth slowed in March at the sharpest pace since 1993 but corporate lending hit a fresh record high, and economists said the data was unlikely to ease the ECB's inflation fears.[24] A poll of 45 economists showed a median forecast for euro zone inflation to ease to 3.4 percent in April from a record high of 3.6 percent hit in March. It is expected to dip because of base effects from a sharp rise last year in German tuition fees as well as a sharp increase in food prices at that time.[26] European annualized inflation estimates for April are expected to rise by 3.4%, which is less than March's rise of 3.5%. Economists at Capital Economics said in their research note that the decline in the rate of inflation is mostly due to higher food and energy costs last year. Despite the cooling inflation, the ECB will remain "distinctly hawkish," they added.[27]
Forecasts ranged from 3.2 to 3.7 percent. A mild fall would not be likely to ease tensions at the ECB, which has an inflation ceiling of 2 percent, and might not loosen hawkish rhetoric from its policymakers. Economists are still forecasting rates to be cut twice by 25 basis points from the current 4.0 percent level in the second half of this year, but many have been pushing into the future the timing of those cuts or taking them out altogether. Financial markets are pricing in a slim chance of a rate hike this year.[26] In an interview with the Financial Times Deutschland, Mersch was also doubtful whether the ECB could bring inflation -- which hit 3.6 percent in March -- under the 2 percent ceiling in 2009 and dismissed economists' expectations for rate cuts ahead.[8]
Markets have hoped that the bank would lower rates much like the U.S. Federal Reserve Bank, Bank of England and Bank of Canada have done. The euro hit its last record of $1.5982 Thursday but dropped back after a Wall Street rally generated optimism that the worst of the U.S. credit crunch may be over. The euro was rejuvenated this week Bank of Americas first-quarter earnings fell short of expectations. More concerns about the health of the U.S. economy came Tuesday after the National Association of Realtors reported that sales of existing single-family homes and condominiums dropped by 2 percent in March, the seventh such drop in the past eight months.[28] The greenback was supported by renewed confidence on Wall Street where stocks rebounded overnight on robust earnings news from Boeing and as two big U.S. insurance firms announced merger plans. Muramatsu said the optimism could prove short-lived as jitters about the U.S. economy and the health of its financial system persist, with banks still reluctant to lend to each another amid a global credit crunch. "There is a negative downward spiral because higher borrowing costs will pressure corporate earnings which will then affect the overall economy," he said. Market players expect the U.S. Federal Reserve to lower its benchmark rate by 25 basis points next week, which would be a smaller cut than at previous meetings where the central bank had slashed rates by 50 or 75 basis points.[29]
NEW DELHI: Hit by surging food and commodity prices, inflation is a problem on both sides of the Atlantic ''' for the U.S. Federal Reserve and the European Central Bank (ECB) ''' but their responses have been markedly different. The reason, in large part, is explained by the difference in their mandates.[3] ECB board member Lorenzo Bini Smaghi said inflation in the euro area had reached intolerable levels and it was not acceptable to ask the central bank to ignore it. In an interview with Italian weekly magazine Il Mondo, Bini Smaghi said not all European countries shared the position of those governments who have criticised the ECB's exclusive focus on price stability.[30] LONDON - Euro zone inflation is likely to have cooled slightly in April thanks to a comparison with a strong rise this time last year, but will still hold at disturbingly high levels for the European Central Bank.[26]
With the ECB still uncomfortable with the current high inflation levels, the central bank cannot immediately consider easing monetary policy for fear of exacerbating inflationary pressures in the single currency zone further.[9] ECB'''s Trichet and Stark yesterday said the central bank'''s '''current monetary policy''' should be sufficient to deal with inflation pressures while ECB member Bonello reported '''I do not think there is anyone who is considering higher interest rates."[23] FRANKFURT (Thomson Financial) - European Central Bank executive board member Juergen Stark said that since the start of the financial market crisis, the ECB's monetary analysis has proven to be 'a crucial bulwark for the conduct of monetary policy in the euro area'.[31] The central bank is likely to move towards a more neutral monetary policy directive. Japanese financial markets will be closed this Tuesday for a national holiday. The Japanese government released a report overnight that indicates exporters on average expect they can remain profitable if the U.S. dollar remains stronger than ''104.70.[23]
The financial markets are now pricing in an interest rate cut by the European Central Bank in 2009.[23] FRANKFURT (AFP) — The ECB is holding firm on interest rates while waiting to see if global growth and commodity prices run out of steam, analysts said Wednesday following new insights from central bank policymakers.[12] Canada's inflation is below 1.5% and the bank reckons "some further monetary stimulus" will be necessary to meet the 1-3% target over the medium term. By contrast, Norway's central bank raised its key interest rate by 0.25 percentage points to 5.5%. The bank said that in reaching its decision, the prospect of higher inflation outweighed concerns about a slowdown in the global economy.[32] Export orders rose 12.79% year-on-year to US$31.62 billion in March, slower than 18.08% registered in February. In a move to control soaring inflation, the Central Bank of Sri Lanka retained its key interest rate for the fourteenth straight meeting.[22]
Inflation driven by rising costs will discourage spending by firms and consumers alike and leaves the Bank of Japan in a precarious position. While the policy board likely remains in favor of rate normalization, substantial downside risks to exports and faltering consumption will force the Bank to leave rates unchanged and if anything, will lead them to consider cutting rates. With interest rates already at an ultra-low 0.50 percent, the stimulating potential of a 25bp rate cut would be extremely small and leaves the odds in favor of steady rates for much of this year.[25] Sweden is a member of the European Union but not of the eurozone. The British pound steadied, meanwhile, after it emerged that Bank of England policymakers voted 6-3 in favour of an interest rate cut to 5.00 percent earlier this month.[16] Markets are expecting the Federal Reserve to trim interest rates again next week, widening the gap with eurozone rates, but there is uncertainty over how aggressive the reduction is likely to be. The Swedish central bank, the Riksbank, decided to hold its key short-term interest rate, the repo rate, at 4.25 percent.[16] The dollar edged up to 103.65 yen after 103.51. The euro retreated after French central bank chief Christian Noyer said Wednesday eurozone interest rates could "move in both directions."[29] The euro pierced a record high above $1.60 on Tuesday after hawkish comments from ECB Governing Council members Christian Noyer and Yves Mersch prompted investors to speculate whether the central bank's next move would be a rate hike rather than a cut. However Noyer later said the markets had read too much into his comments, the Wall Street Journal reported, and this prompted investors to pare back more aggressive long positions in the euro.[20] April 25 (Bloomberg) -- The European Central Bank possesses the tools and experience to handle a banking crisis that crosses national borders, Christian Noyer, a member of the bank's Governing Council, told the Wall Street Journal.[33]
Comments Noyer made a day earlier had been taken to mean that eurozone rates might have to rise to stifle inflation. His latest remarks provided insight into how the European Central Bank was mulling the possibility that a sharp easing of inflation pressures might already be in the pipeline.[12] Eurozone money supply growth, a leading indicator of inflation, slowed sharply in March, provisional data from the European Central Bank showed.[34] FRANKFURT -- Growth in euro-zone money supply, an indicator of future inflation, showed the first signs of slowing in March, the European Central Bank reported Friday.[35]
March broad M3 money supply growth jumped 10.3% on the year, easing from February's 11.3% rise, the European Central Bank said Friday. That's the lowest growth rate since April 2007, however corporate lending continued to rise.[7] Annual M3 growth slowed to 10.3 per cent in March from 11.3 per cent in February, the European Central Bank reported on Friday. This marked the biggest fall since September 1993 and was down two percentage points from the all-time high of 12.3 percent in October.[24]
Friday morning, the European Central Bank on said that the Euro zone M3 money supply grew at a slower pace of 10.3% year-on-year in March.[36] The evidence of weak business confidence in what is viewed to be the euro zone's most robust economy comes on the back of Wednesday's weak PMI survey of the manufacturing sector, and a disappointing performance recently in the retail sector. Should the German economy continue to falter, the European Central Bank may soon have to review its current hawkish stance, especially given that there have already been signs of declines in the rest of the euro zone. 'If this last bastion is about to fall, the ECB could run out of arguments for its hawkishness,' said Brzeski.[9] With signs that the euro zone's largest economy is slowing, and the outlook for growth in the rest of the single currency zone looking less than rosy, inflationary pressures should eventually ease, in turn becoming less of an issue for the ECB. 'The euro zone economy looks like it's going to slow markedly year-on-year and that should create medium-term disinflationary pressures, which should offset the inflationary pressures coming from oil and commodities at the moment,' said Page. European bonds were already higher ahead of the Ifo survey after the Bank of France's Christian Noyer 'clarified' some remarks he had made previously to give them a slightly less hawkish gloss.[9]
NEW YORK (Reuters) - The euro had its biggest drop against the U.S. dollar in three weeks on Wednesday as soft economic data and comment from European policy-makers indicated the weaker U.S. currency is hurting euro zone economic growth.[21] NEW YORK, April 23 (Reuters) - The euro retreated from a record versus the dollar on Wednesday after a fall in manufacturing activity suggested that economic growth in the euro zone is starting to slow.[17]
EU labor markets have improved substantially and corporate balance sheets rest on sound foundations despite an expected fall in profitability in the near term. Although European companies are significantly affected by rising oil and commodity prices, but a strong euro and higher energy efficiency attenuate their exposure compared with global competitors. BusinessEurope expected the economic growth in the euro zone to stand at 1.7 percent this year.[14] BRUSSELS, April 24 (Xinhua) -- European businesses remained cautiously optimistic about the economic future amid increasing uncertainties, according to a survey released on Thursday. "Despite the numerous headwinds, BusinessEurope so far remains cautiously optimistic and sees no risk of a recession on this side of the Atlantic," the umbrella organization of European business federations said in its spring economic outlook, which was based on a survey of its members. The report said European businesses continued to expect EU economic growth to average two percent this year with a further decline in the unemployment rate to 6.8 percent, roughly in line with an earlier forecast made by the European Commission.[14]
The U.S. dollars slide against other world currencies has seen the euro climb some 8 percent since the start of the year, making German cars, French champagne and Italian handbags more expensive for American shoppers. The 15-nation European currency hit a new high of US$1.6018 on Tuesday before sinking on signs of lower growth in France and Germany this year.[2] The government and National Bank of Slovakia have spent years trying to get the economy fit, putting spending on a diet, overhauling the tax system and earning praise from the World Bank for being "one of the fastest reformers in the world." The International Monetary Fund estimates that the country's economy will grow at 6.6 percent this year compared to less than 2 percent for the euro area as a whole. For the more than 800,000 people over 60 in the country, adjusting to a new currency (the euro would be their fourth currency in 20 years) might not be easy.[6]
The single currency had risen on Tuesday after Noyer, who is also a member of the ECB governing council, said that the bank was ready to move on rates if necessary and aimed to bring inflation back below 2.0 percent next year.[29] Noyer told French radio that the ECB would change interest rates "if necessary" to reduce inflation to less than 2.0 percent next year.[16]
Swiss National Bank President Roth said '''In essence, our confidence is based on the fact that monetary policy of the past three years has been successful in gradually normalizing the interest rate level.''' He added commodity prices '''pose a predicament in terms of monetary policy, and the resultant uncertainty this causes is not exactly beneficial for Swiss companies.'''[23] In the UK, gilts were soft after the minutes to the last Bank of England policy decision, when the benchmark Bank Rate was reduced a quarter point to 5.00 percent, diminished market expectations that the Monetary Policy Committee will be cutting interest rates for the second month running in May.[37]
The British pound drifted lower to $1.9803 from $1.9952 the night before after minutes from the Bank of Englands last Monetary Policy Committee meeting showed that concern about inflation there in the face of a weaker pound and higher utility and food costs. "Certainly, inflation expectations have risen recently, while latest surveys show that companies are currently very keen to raise their prices to support their margins," said Howard Archer, chief UK and European economist at Global Insight.[28] Britain's pound drifted lower against the dollar to $1.9803 from $1.9952 in late New York trading Tuesday after minutes from the Bank of England's last Monetary Policy Committee meeting showed concern about inflation there in the face of a weaker pound and higher utility and food costs.[11]
Lehman Brothers chief economist Sonal Varma said, '''The interplay between slowing growth and rising inflation has increased the dilemma for monetary policy. We expect RBI to keep all policy rates unchanged at its monetary policy meeting.'''[3] Mersch told the Financial Times Deutschland Tuesday that a changing global economy was possibly leading to a decoupling of growth from inflation. "That would have possible consequences for monetary policy options," he said.[12]
Stark said that the recent financial market turmoil has re-emphasised the importance and special nature of the banking sector 'in the transmission of monetary policy and determination of macroeconomic outcomes'. 'Developments over the last few months surely demonstrate that banks play a distinctive role in creating 'monetary liquidity' that, in turn, is an important determinant of developments in credit and asset markets, in the evolution of the economy and ultimately of price dynamics', he said. Speaking to reporters on the sidelines of the conference, Stark also said the ECB is 'well positioned' with its analytical framework, which enabled it to react in a timely manner to the financial market crisis. 'We also have won valuable insights through the analysis,' he added. The ECB's monetary policy strategy is based on two pillars -- economic analysis and monetary analysis, but analysts said the latter's usefulness is being questioned in some quarters outside of the ECB.[31]
The German Ifo business climate indicator Thursday fell to 102.4 from 104.8 in March, well below analysts' forecasts of a decline to 104.3. After the news, financial markets began to price out any likelihood of a rate hike later this year and are now forecasting a rate cut.[38] The Bank of Canada lowered its benchmark interest rate from 3.5% to 3% at its meeting on April 22nd, the third time it has cut rates this year.[32] Having been pessimistic on the U.S. economic outlook for some time, investors are now embracing upside data surprises, analysts say. The perceived odds of the Fed keeping its benchmark interest rate unchanged at 2.25 percent at its meeting next week is now about 26 percent, futures trading shows FEDWATCH. Just over a week ago, futures were evenly split between a 25 and a 50 basis point cut.[39] THE dollar traded at three-week highs against the euro, boosted by a growing view the Federal Reserve may stop cutting interest rates soon and that euro rates have peaked. U.S. economic data this week showed resilience in some sectors, such as the labour market, contrasting with a sharp drop in business sentiment in Germany. Mark Meadows, a market analyst at Tempus Consulting in Washington, said: "It's a major shift in sentiment regarding the outlook for interest rates and we may see the dollar strengthening until the next Fed meeting."[30]
Equity markets have stabilised of late as investors expect the rate cuts and special measures so far enacted by the Fed and the U.S. government to help the banking and mortgage markets, allowing the Fed to pay more attention to inflation risks. The strength of this sentiment was obvious by the lack of any dollar reaction to weak U.S. home sales data yesterday 'that did not spoil current market optimism that the worst in the U.S. is over and the U.S. economy will do better in a not too distant future, allowing the Fed to signal a rate cut pause next week', said Carsten Fritsch at Commerzbank.[38] Despite the clamour to cut rates from many quarters, including IMF, ECB has shown reluctance to take cues from the Fed and the Bank of England and cut borrowing costs. It is seen as not doing much to counter the U.S. recession by cutting rates and boosting economy in the Eurozone.[3]
'The currency market had a bit of an action overnight. There is a growing uncertainty as to the size of the Fed's rate cut next week, whether it's going to be 25 or 50 basis points,' said Thomas Lam, senior treasury economist at United Overseas Bank (other-otc: UOVEY.PK - news - people ). At 1:00 p.m. (0500 GMT), the dollar was trading at 103.03 yen from 103.01 yen in Sydney this morning.[1]
The decline in the year-on-year (M3) rate is primarily due to a base effect. If you look at the month-on-month rate it's still rather high," he said, citing a 0.7 percent month-on-month rise. Schubert and BNP Paribas economist Ken Wattret both said the record growth in corporate borrowing was largely due to firms avoiding the full force of the credit crunch by raising money directly from banks instead of illiquid credit markets. "It suggests at face value there is still no credit crisis going on in the euro zone," said Wattret. "I suspect there is some distortion in this data.[24] The three-month interbank lending rate for the euro zone reached 4.837 percent on Thursday, the highest level since Dec. 18, according to the WSJE. Noyer told the newspaper that, while the cause of the recent surge in lending rates remains unclear, he believes the banks' desire to keep cash for unanticipated needs and fears of the creditworthiness of other banks are contributing to tensions.[18]
"The market is giving some credibility to Noyer backing off hawkish comments, it seems there's more sensitivity to interest rates," said Adam Cole, global head of currency strategy at RBC Capital Markets. The euro is up more than 9 percent this year and its breach of $1.60 prompted chairman of the Eurogroup of finance ministers Jean-Claude Juncker to say the euro's exchange rate is excessively volatile, which also prompted a slight dip in the euro.[20] Noyer told the Wall Street Journal on Wednesday, after the euro had broken briefly above 1.60 dollars the day before, that eurozone interest rates could be changed upwards but also downwards. The newspaper, reporting that Noyer said that financial markets had over-interpreted his remarks on Tuesday, cited him as explaining in an interview: "Movements (of interest rates) can go both ways.[16] The difference in interest rates has pushed the dollar lower against the euro, which set a new record above 1.60 dollars on Tuesday.[12] NEW YORK, April 25 (Reuters) - The dollar headed for its best monthly performance in 2-1/2 years against a basket of major currencies on Friday, boosted by a growing view the Federal Reserve may stop cutting interest rates.[39] The dollar, meanwhile, has benefited from speculation that the Federal Reserve may stop cutting interest rates after next week's policy meeting.[38] Federal Reserve policymakers meet for two days to set interest rate policy, with most dealers expecting anothe.[2]
Mexican consumer prices unexpectedly increased in early April, putting pressure on the central bank to hold interest rates steady at 7.5 % for the sixth straight month on April 18.[36] Traders are paring bets the next move by the European Central Bank would be a hike in benchmark interest rates.[39]
LONDON (AFP) — The euro eased on Wednesday but held close to the record high point above 1.60 dollars which it struck on Tuesday amid strains in the U.S. economy and comments from the European Central Bank, dealers said.[16] Outside the Euro zone economy, different news from central banks attracted attention.[22]
'(The data) leaves hawkish European Central Bank rhetoric looking a little out of step with economic reality,' said Steve Pearson (nyse: PSO - news - people ), chief currency strategist at BoS Treasury.[38]
Sylvain Broyer at the Natixis brokerage said: "Should the oil price fall by 20 percent in the third quarter as we still expect," it could trim eurozone inflation by a full percentage point. That view was at odds with comments by Yves Mersch, head of Luxembourg's central bank and another ECB governor.[12] The Bank of France's Christian Noyer joined other officials from Europe yesterday in airing concerns about the faster rise in consumer prices and that the central bank will do whatever is necessary to keep a lid on inflation.[37] Eurozone inflation hit a record 3.6% in March, well above the target level of 2%. This is the fastest rise in inflation in the 15-nation Eurozone in 16 years, suggesting the bank may act to restrain consumer prices if inflation does not slow down.[3]
Core inflation, which excludes the prices of fresh food, also jumped by an annual 1.2 % to match expectations following a 1.0 % increase in February. Consumer sentiment fell to its lowest level in 26 years in April, according to the revised reading of the Reuters/University of Michigan consumer sentiment index that was released on Friday, with the index coming in below economist estimates.[36]
The March figures are broadly in line with market expectations of 10.4% annual M3 growth and a three-month rate of 11.0%. Thursday, ECB President Jean-Claude Trichet said he fully confirms the Governing Council's policy stance as contributing to the achievement of price stability, which it defines as an average inflation rate just below 2% over the medium term.[7] CPI is rising at record levels, which will keep the ECB talking tough on inflation, 'but the extent to which markets will now believe threats of policy tightening is much reduced,' said Pearson. The downtrend in the euro continued after data this morning showed money supply growth eased in March from high levels.[38]
Inflation in the euro area reached 3.6 percent in March, the highest level since June 1992 and well above the ECB's 2 percent target for the year.[1]
What would ultimately be a more than 500-point plunge in EURUSD was further depressed on Friday by mildly dovish comments from ECB members and declines in two second tier inflation indicators. This morning, central banker Lorenzo Bini Smaghi noted that inflation in the region had reached an acceptable level and further that the euro was pressing record highs largely due to the weakness in its U.S. counterpart.[25]
Inflation The April Citigroup/ YouGov inflation expectations survey shows that inflation is expected to reach 3.8 per cent over the next 12 months. This was the highest level since the series started, in 2005, and is substantially above the Bank of England's target inflation rate of 2 per cent.[34] Japan's core inflation hit a ten-year high of 1.2 per cent in March, in line with analysts' expectations, up from 1 per cent in February, official figures showed. Royal Bank of Scotland is considering selling a strategic stake in its insurance business and running the owner of Direct Line and Churchill as a partnership as it moves to raise capital to repair its tattered balance sheet.[34]
The central bank noted that underlying inflation, which excludes food and energy prices, remained at 9.3% in March, while headline inflation accelerated to 23.8% in March.[22] Chilean Central Bank President Jose De Gregorio said on Friday that inflation would gradually decrease in the second half of the year.[36] The Mexican central bank said yesterday that annual inflation in the first half of April rose to 4.53 %. This set a fastest pace since May 2005, and above the bank's forecast of 4.5 % for the second quarter.[36] The central bank is projecting 2008 inflation of 4.5 %, compared to 7.8 % in 2007.[36]
The central bank is also monitoring an increase in money- market rates to learn how to calm turmoil in financial markets, said Noyer, who also heads the French central bank.[33] LONDON (Thomson Financial) - European government bonds remained in positive territory after a leading European Central Bank official 'clarified' remarks he made yesterday.[37] FRANKFURT (AFP) — The eurozone payments current account showed an estimated surplus of 4.3 billion euros (6.8 billion dollars) in February, after a deficit of 7.9 billion in January, the European Central Bank said on Wednesday.[40] 'If the move is sustained it is likely to induce more verbal intervention from Eurozone officials,' Noonan said. He said, verbal intervention is unlikely to discourage the market as there was a subtle shift in central bank expectations earlier in the week.[1]
The UK and Canadian central banks have likewise followed the Fed in easing monetary policy to help solve the credit crisis that stemmed from unpaid housing mortgages.[1] Minutes of the session, held on April 9 and 10, revealed that six members of the nine-member Monetary Policy Committee, including the Governor, voted in favor of the proposition to reduce Bank Rate by 25 basis points to 5.0%.[22] The 3-way split, the first since May 2006, had been anticipated by a number of Bank watchers though the market consensus was that eight or nine of the Monetary Policy Committee would fall in line behind governor Mervyn King's preference for a quarter point cut.[37] The effect was watered down by upward revisions to figures for January and February. David Page, at Investec, said the firm trend of sales 'on face value reduces the odds of a near-term cut in interest rates', but he stressed the official figures are 'totally at odds' with anecdotal evidence on the high street, as well as measures of consumer confidence that are at 15-year lows. 'The Monetary Policy Committee will be confused by this picture,' Page said.[9]
Economists said the ECB could not take the data at face value, however, due to distortion from financial market turmoil. "It supports the ECB's perception that upside risks to inflation still persist and that there's no scope to cut interest rates," said Commerzbank economist Michael Schubert. [24] Economists also see the European Commission's Economic Sentiment index falling next week to 99.0 from 99.6 when data is released at the same time as inflation figures.[26]
Vicky Redwood, economist at Capital Economics, agreed. 'The continued mixed news about the strength of the consumer sector boosts the chances that the MPC will proceed fairly cautiously in cutting interest rates,' she said, noting that the firm official data contrast markedly with downbeat surveys and other snapshots of the high street.[9] Bank of England's rate-setting body stood divided, splitting three ways for the first time in nearly two years, while deciding to cut the key interest rate in April.[22] Traders are reducing bets the next move by the ECB will be a hike in benchmark interest rates amid conflicting signals from ECB policymakers and signs of a weaker economy. "While most people believe the Fed is about to end its easing cycle, a growing number of investors believe the ECB may have to start cutting."[30] We are keeping interest rates at 4 percent at the moment because that seems to us the appropriate level to bring prices back."[8]
Japanese fundamentals have had little bearing on price action in the yen pairs for quite some time, but it is worth noting that Japanese headline inflation jumped to an annual rate of 1.2 percent in March, the highest reading in a decade.[25] Data for Italy is also scheduled for release on Wednesday. Some see no let-up for inflation this month. "Energy and transport prices likely edged up this month and we do not see any relief for inflation," said Kenneth Broux at Lloyds TSB, who forecast it to hold at 3.6 percent. He said around a 10 percent increase in oil prices during April, as well as rising food prices, would counteract any downside base effects. It does not support any case for lower rates." Oil prices rose from around $100 a barrel at the start of the month to a record above $119 this week. They have since retreated only slightly to trade around $118. A separate poll this week showed inflation averaging 3.0 percent this year.[26] The global inflationary wave is empowering monetary authorities in many emerging economies, including China. Administrative controls like price caps are the tools of choice of planners, but these are not working and can be counter-productive unless inflation really is a short-term phenomenon. If inflation lasts longer, as seems likely, the administrative approach will fail and more definitive monetary approaches ''' tightening liquidity and appreciating currency ''' and fiscal steps ''' cutting import duties and subsidising poor consumers ''' will come to the fore,''' he said. RBI will present its GDP forecasts for the financial year 2008-09 for the first time and is widely expected to scale down its projections from the earlier 8.5% to 8-8.5%.[3] Singapore's Department of Statistics brought a new picture of increasing consumer prices in the country. According to the latest report, Singapore's annual inflation reached its highest level in 26 years on rising food and oil prices.[22]
A report from BusinessEurope, which says it represents more than 20 million small, medium and large companies, said damage to export markets had been limited so far but "expecting emerging countries to compensate for weaker U.S. growth and consumption is hardly feasible." Household spending in fast-growing economies such as Brazil, Russia, India and China which are all buying far more European goods represent only a third of the American consumer market, it said. Euro exports to the U.S. were flat in January, worth no more than they were a year ago.[2] The European Union approved Tata's $2.3 billion (£1.16 billion) purchase of Jaguar and Land Rover yesterday. Ultra Electronics, the electronics designer and manufacturer, said that its first-half trading performance had been encouraging and in line with the company's expectations. The company said that demand in its main markets remains strong and that it had room for further growth. Vernalis, the biotechnology company, has reported a narrower full-year operating loss of £31.7 million, down from £40.8 million last year, and said that it considers the sale of Apoklyn, its Parkinson's disease drug, and its U.S. operations to be "highly probable". GlaxoSmithKline has received a second positive indication for its Tykerb breast cancer treatment from the European Medicine Agency, which recommended conditional marketing approval for the product in European Union countries. Nippon Steel Corp, Japan's biggest steelmaker, has reported its first annual pretax profit fall in six years, to 564.12 billion yen (£2.7 billion), saying that profit margins for the year ended March were under pressure from surging costs of raw materials such as coke and ore.[34] Bankers managing the sale of RBS Insurance are preparing to send out sales memorandums to prospective buyers, including private equity firms and trade buyers, over the next few weeks. Aviva, the UK insurer that owns Norwich Union, has reported a better than expected 5 per cent rise in first-quarter sales, with strong growth in the U.S. and Asia compensating for a downturn in the UK. The group said its life and pension sales for the three months to March 31 rose to £8.2 billion, from £7.6 billion last year. F&C; Asset Management said that its total assets under management for the first quarter declined to £101.8 billion, because of significant challenges created by volatile equity markets, illiquid credit conditions and a general deterioration in retail investor sentiment.[34]
The annualized rate is expected to show a 2.8% rise following March's rise of 3.1%. The European Commission will release its economic growth forecast.[27] The European Commission was scheduled to release a new economic forecast next week, with further cut down of growth expected.[14] Why the pound rally? Well, considering the IMF has forecasted the worst pace of growth since 1992, traders likely expected much worse. Though the European economic calendar has been relatively light this week, the euro has still managed to close at its lowest level in three weeks against the benchmark dollar.[25]
Manufacturing firms in the euro area were far less busy in April than March, according to the initial results of a survey of purchasing managers. The activity index fell from 52.0 to 50.8, its lowest level since August 2005. Some firms said the strong exchange rate had hurt their export orders. The euro, which had climbed briefly to a new high above $1.60 this week, fell on the news.[32] Euro zone manufacturing activity fell to a near three-year low, the Purchasing Managers Index showed and export orders shrank for the first time since May 2005. This indicates that the currency's strength may be starting to impact the wider economy, though the data had little impact on the euro.[20] The industry confidence is expected to show a reading of -1.0 following March's flat reading, and services confidence is expected to remain steady from last month's reading of 9. Economists from BNP Paribas said in their research note that the decline in confidence is further evidence that the European economy is slowing. "In March, confidence eroded again in the euro zone according to the European Commission's survey," they said.[27] Euro zone consumer confidence for April is expected to show a reading of -13 following March's level of -12.[27]
In 2009, it expected growth to stabilize, averaging 2.1 percent in the EU and 1.8 percent in the euro zone.[14]
Jean-Claude Juncker, the chairman of the euro zone finance ministers, said the euro's exchange rate is now excessively volatile. "The euro zone is not insulated and economic data is beginning to show that," said Omer Esiner, a market strategist at Ruesch International in Washington, D.C. "The market may have gotten ahead of itself betting on a rate hike by the ECB. The euro now is overstretched and policy-makers are making it very clear they are not satisfied with it."[21] "The market may have gotten ahead of itself betting on a rate hike by the ECB," said Omer Esiner, a market strategist at Ruesch International in Washington. "The truth is that today's economic data out of Europe was pretty disappointing and Noyer backed off from his hawkish comments.[17]
The ECB has held rates for the last 10 months despite moves by the U.S. Federal Reserve, the Bank of Canada and the Bank of England to loosen policy amid continued market tensions. [8] The euro depreciated vis-''-vis the U.S. dollar today as the single currency tested offers around the US$1.5705 level and was supported around the $1.5555 level. The common currency has been given for three consecutive days and this reflects the market'''s changing perception regarding the likelihood of additional monetary easing from the Federal Reserve.[23] In late trading in New York, the euro was down 0.6 percent at $1.5893, after falling as low as $1.5862 earlier. The European currency traded at a record $1.6019 on Tuesday, according to Reuters Dealing 3000, the highest level since its inception in 1999.[21] The common European currency was at $1.5963 per euro at 10:29 a.m. in London, from $1.5991 yesterday in New York, when it climbed to $1.6019, the highest since the currency's launch in 1999.[41]
Pis' income is nearly one-third higher than the average monthly pension of 8,885 crowns, or €275, a sum that is still small in a country that has moved from one of the most economically dour in the region just a few years ago to what the Economist Intelligence Unit has called a "shining star." Pis believes his relative fortune may come to an end if Slovakia abandons its currency, the crown, and joins the European Monetary Union next year. At the current exchange rate, his pension of 11,920 crowns will equal about €370--what he calls the "new money." "You mean those €300 I'll be getting a month? What will I do with three pieces of hundred-euro banknotes?" says Pis, a retired miner who also gets a disability benefit because of an injury suffered on the job. [6] Slovakia's finance minister and head of the national bank have told the European Commission that the country's target to adopt the euro is 1 January 2009. If all goes as planned, by July all prices in Slovakia will be listed in both currencies to ease the transition, and the country will inaugurate the new year with new coins and banknotes. "This duality will be in effect even all throughout 2009 when the euro will have already been introduced," explained Ivan Sramko, head of the National Bank of Slovakia.[6] Bank of England The Bank of England's scheme to free up Britain's home-loan market by injecting £50 billion into the banking sector could be disrupted by European regulators because it gives unfair advantage to British banks over rivals, competition lawyers said yesterday. Economic growth fell to its weakest in three years in the first quarter as the credit crunch sapped activity in key parts of the services sector, official figures showed yesterday.[34] The 2.5 percent pace of growth through the year was a slight miss of economists' 2.6 percent forecast, but set a three-year low for economic activity nonetheless. It comes as no surprise that the biggest weight on expansion was the cooling in the financial services component (which makes up 28 percent of the economy) to a five-year low given the ongoing credit crunch that forced the BoE to nationalize Northern Rock and offer ever more aggressive liquidity injections.[25] 'We need to see some retracement in the pace of inflation before the ECB starts to think about supporting growth in the economy,' said David Page, an economist at Investec.[9]
'March's slowdown in annual eurozone M3 growth might help to ease some of the ECB's concerns regarding the inflation outlook,' although other price indicators are less reassuring, said Ben May at Capital Economics.[38] RBI'''s focus on growth, inflation and curbing currency volatility means there may be more lessons from the Fed than from ECB. The response of monetary authorities may have to vary from country to country.[3]
Fed policy makers "will be biased toward a steady rate going forward and will probably express more concern about inflation," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.[29]
Bank of Spain Governor Miguel Angel Ordonez said the ECB had kept rates unchanged as the best way to prevent second-round effects on inflation from imported energy costs. "At some point in 2009, we will have inflation back below 2pc," he said.[30] ECB member Bini Smaghi said the ECB cannot ignore the '''intolerable levels''' of inflation. Other data saw German March import prices up 0.4% m/m and 5.7% y/y.[23] Data released in Japan overnight saw March core inflation accelerate to a ten-year high of 1.2% on account of escalating energy prices, the sixth consecutive monthly increase.[23]
German inflation is also expected to ease in April to 2.8 percent from 3.1 percent in March when data is released on Monday.[26] European annualized inflation estimates are expected to rise by 3.4%, which is down compared to March's rise of 3.5%.[27]
March broad M3 money-supply growth was up 10.3% on the year, easing from February's 11.3% rise, the ECB said. It is the lowest M3 growth rate since April 2007.[35] Loan growth to non-financial corporations surged 15.0% on the year in March, surpassing February's growth rate of 14.8%.[7]
Money supply growth fell in March but remained at a robust level, showing little sign that financial market turmoil is curbing bank lending.[7] In eurozone news, the EMU-15 M3 money supply growth rate fell to an annualized 10.3% from 11.3% in February.[23]
A rate cut, therefore, appeared unlikely until consumer prices come off the boil or growth takes a sudden turn for the worse.[12] Rising prices will only add to deep housing market slump, a related credit crunch and rising job cuts. Economists feel this may prompt American consumers to cut back on spending, further denting growth.[3]
The final figures for the University of Michigan consumer confidence indicator will be watched later in the day, with no expectations of a revision to the preliminary reading of 63.2. In the UK, the pound has remained well-bid after upbeat retail sales data Thursday and hawkish Bank of England minutes on Wednesday, but analysts still believe it remains overvalued as growth is set to deteriorate materially this year.[38] Regarding regulatory oversight in the euro zone, Noyer rejected the idea that the zone would not be able to handle a major banking crisis because responsibilities are divided between national authorities. 'I have managed a crisis encountered by a large and internationally active bank, and so have some of my colleagues,' said Noyer, who as governor of the Bank of France was faced earlier this year with the revelation of a 4.9 billion euro trading loss at Societe Generale. 'We have procedures, we have tested them, we know they work,' he said, rejecting the 'theoretical musings' of critics of the euro zone's regulatory system.[18] The latest survey results of Royal Bank of Scotland and NTC Economics showed flash Euro zone composite output index rose slightly in April.[22]
In November, the M3 indicator, which includes cash, overnight deposits, other short-term deposits, repurchase agreements, shares and units in money market funds and debt securities with a maturity of up to two years, stood at a record high of 12.3%. It is a widely-watched indicator of medium-term inflationary trends in the euro zone economy, though experts have increasingly questioned its relevance.[10] Speculators had taken the remarks as a hint at a possible ECB rate hike and the euro, powered by fresh fears for the health of the U.S. economy, on Tuesday broke through the 1.60-dollar threshold for the first-time.[29] LONDON (Thomson Financial) - The euro continued to fall against other major currencies after data this week illustrated how the eurozone economy will not be immune to the U.S. recession and the global economy's credit crisis.[38] 'The decline of the Ifo index should wake up all decoupling believers who over the last months steadily advocated that the German economy had been able to shrug off the financial crisis and the U.S. slowdown,' said Carsten Brzeski at ING (nyse: IND - news - people ).[9] LONDON (Thomson Financial) - European government bonds got a shot in the arm after a key survey of confidence in the area's biggest economy signalled a worrying slowdown. The German Ifo research institute said its April business climate index fell to 102.4 from 104.8 in March, well below analysts' forecasts of a more modest decline to 104.3.[9]
The dollar inched up against the Japanese currency, rising to 103.52 yen from 103.09 yen. It climbed to 1.0175 Canadian dollars from 1.0084 Canadian dollars, and gained to 1.0158 Swiss francs from 1.0028 Swiss francs. Renewed concern about the health of the U.S. economy came Tuesday after the National Association of Realtors reported that sales of existing single-family homes and condominiums dropped by 2 percent in March, the seventh such drop in the past eight months.[11] And, while the revision is rarely a market mover, the downside adjustment to a new 26-year low stands as a poignant reminder of why economists and traders are still wary on the outlook for the U.S. economy and the dollar.[25] At about 9:40 am ET, the dollar reached 1773.50 against the Colombian peso, compared to a multi-year low of 1761.10 hit on Wednesday. U.S. Treasury Secretary Henry Paulson said on Thursday that he was willing to talk in an interview with House Speaker Nancy Pelosi about her ideas for new legislation to help the U.S. economy in connection with setting up a vote on the Colombia Free Trade agreement. On the housing side, he said he was supportive of parts of a Democratic plan to expand Federal Housing Administration insurance.[36] The U.S. currency was hit on Tuesday by weak U.S. housing news and fresh worries about the health of the U.S. economy.[16]
Theoretically, we would expect the currency of an economy that just reported a drop in growth to fall; however theory clearly didn't follow with today's UK GDP release. The advanced reading of first quarter expansion came in line with expectations with its quarterly measure, but fell short of the official consensus with its annualized figure.[25] Growth of the ECB's broad M3 measure fell to 10.3 per cent in March, from 11.3 per cent in February.[34] For private-sector loan growth 11 economists on average expected 10.6 percent growth, versus the actual slowdown to 10.8 percent from February's upwardly revised 11.0 per cent.[24] Sylvain Broyer, an economist at the Natixis brokerage commented on the data by saying: "The downturn in broad monetary growth is now definitely engaged: a reason less for the ECB to maintain last days' hawkish tone, especially after the surge in Spanish unemployment and the fall in business climate across Europe."[13]
First-quarter GDP data later today will be the focus, with the market forecasting the quarterly growth rate to dip to 0.5 percent from the previous quarter's 0.6 percent, dragging the annual rate down to 2.6 percent from 2.8 percent.[38]
Fed Fund Futures are pricing in only a 74 percent chance of a 25bp rate cut while the remaining 26 percent is calling for no change. This is a considerable change from where we were only a few weeks ago, but we have also seen evidence that the credit crunch is easing.[25] 'On Friday the consensus was that the Fed was just about done easing and the ECB might have to start easing some time later in 2008. This morning the popular view is that the ECB might have to hike one more time and the Fed might not be finished after they ease 25 basis points next week,' Noonan said. The ECB has kept its rate unchanged since June, while the Fed has lowered its rates by 3 percentage points since September.[1] Markets think the strength of the euro also limit the scope for widening the gap between ECB and Fed rates.[30] "Rate expectations are really shifting," said Mark Meadows, a market analyst at Tempus Consulting in Washington. "While most people now believe the Fed is about to end its easing cycle, a growing number of investors believe the ECB may have to start cutting rates really soon.[39]
With two MPC members voting for maintaining the bank rate, expectations of a rate cut in the near term were trimmed.[22] The three-way split in April took many economists by surprise as expectations were for a unanimous decision to cut the key rate.[22]
'After today's minutes we have revised down the probability of a May rate cut to 20 percent (from previously 40 percent),' said Lavinia Santovetti, analyst at Lehman Brothers (nyse: LEH - news - people ).[37] "Further rate cuts may not be the most effective way to handle a further deterioration in the economy and the worsening mortgage crisis."[29]
"The market consensus is that the only way for interest rates to go is up because the main focus is on long term inflation worries in Europe," said Ryohei Muramatsu, manager of Commerzbank Group Treasury Asia in Tokyo. [29] Even so some market watchers believe an ECB interest rate hike remains likely because of elevated inflationary pressures.[29] "I would never engage in a discussion about the future path of interest rates, simnply because nobody knows. It would be dangerous to make predictions in either direction."[16]
The bank is worried that surging energy and food prices could lead to a wage-price spiral. Its benchmark rate is fixed at 4%. [3] 'After the euro rose to a record high against the dollar, there is some short-covering on the dollar today,' said Lam. France's Christian Noyer joined other officials from Europe such as Yves Mersch, Axel Webber and Jean-Claude Juncker in airing their concerns about the faster rise in consumer prices.[1] Across Slovakia, the chance to become only the second of the EU countries in Eastern and Central Europe to join the euro zone is being met with a combination of pride that the poorer half of the old Czechoslovakia has matured, and trepidation that the currency shift will be accompanied by higher prices.[6] Euro zone industrial new orders grew 0.6% month-on-month in February, the Eurostat announced.[22]
The euro fell to 1.5853 dollars in Tokyo afternoon trade from 1.5882 late on Wednesday in New York and to 164.32 yen from 164.42.[29] NEW YORK -- The dollar rose against its major rivals Wednesday, taking back some ground a day after the euro topped $1.60 for the first time.[11]
In early European trading, the single currency dipped to 1.5956 dollars, from 1.5988 in New York late on Tuesday, when it had struck a lifetime pinnacle of 1.6019.[16] Most of the moves in the dollar came early in the New York session and, without any new U.S. data or news, the dollar's direction was set for the remainder of the day.[21]
TOKYO (AFP) — The euro dropped against the dollar and the yen in Asian trade on Thursday after weak manufacturing data and comments by European financial officials, dealers said.[29] BusinessEurope said the euros "sharp and rapid appreciation" versus the dollar risks hurting the European economy, particularly the heavy engineering and chemicals industries that measure costs in euros and sales in dollars.[2] Despite persistent worries about the U.S. economy, the dollar benefited as the euro dropped back.[11]
The Japanese yen ended the day very mixed across the majors, as the low-yielding currency fell against the U.S. dollar and the British pound but rallied versus the euro and high-yielding Aussie and Kiwi dollars.[25]
SCi will use the funds to pay down debt and for working capital. LM Ericsson, the Swedish telecoms group, has reported a 46 per cent fall in its adjusted pretax profits from a year earlier, to SKr4.5 billion (£379 million), as weakness in the U.S. dollar hit operating margins, which shrank to 9.7 per cent, from 19.3 per cent.[34] Vale, the Brazilian miner, said that first-quarter net earnings fell 8.8 per cent to $2.02 billion, hit by currency volatility and a drop in the price of nickel.[34]
Dame Marjorie Scardino, the chief executive, was paid £2.3 million last year, up 18 per cent. The company said that trading was in line with expectations, and appointed C. K. Prahalad and Will Ethridge to its board. BP has confirmed that its Forties Pipeline System (FPS) will be completely shut down by tonight, because of a planned two-day strike at Ineos's Grangemouth refinery.[34] A report from the Ministry of Finance showed Japan's merchandise trade surplus declined 30.2% year-on-year to 1.119 trillion yen in March. That was a much sharper decline than market expectations that called for a 15.3% decline to 1.358 trillion yen. It was also less than the 1.60 trillion yen in the same period last year.[22]
The monthly producer price index (PPI) that tracks wholesale cost of goods and food showed prices rising at a much faster clip than in the previous months. It registered 1.1% in March, up 4% over last year.[3] Germany's index of import prices increased 5.7% year-on-year in March, slower than the 5.9% expected, the Federal Statistical Office reported Friday.[36]
The annualized rate is expected to show a 2.8% rise following March's rise of 3.1%.[27] The three-month average of the annual growth rates of M3 from January to March declined to 11.1% from 11.5% in three months to February.[36] The ECB's three-month moving average for M3 growth, which is less subject to volatility, also eased back however, to 11.1 percent during the period from January to March from 11.5 percent in the December-February timeframe.[13] Loan growth to non-financial corporations hit a fresh record of 15.0 percent in March from February's 14.8 percent.[24]
Loans to the private sector, a sub indicator watched closely by central bankers, rose by 10.8 percent in March, down slightly from the February pace of 11 percent, the bank said in a telephone conference.[13]
For Italy, economists see inflation nudging up to 3.4 percent from 3.3 percent in March.[26] Twenty-five of 45 see inflation easing to 3.4 percent or below, 17 see it dipping to 3.5 percent, while three see it holding at March's level, or even increasing.[26]
"If commodity inflation remains at current levels, the monetary policy dilemma becomes much harder."[12] During the third quarter monetary review, year-on-year WPI inflation was 3.83% on January 12, 2008, which then increased to 7.41% on March 29, 2008.[3] Japan's annual inflation accelerated to a 10-year high of 1.2 % in March, the Ministry of Internal Affairs and Communications said today, marking the largest annual increase since a 1.8 % on-year jump in March 1998.The reading was exactly in line with analyst expectations following an increase of 1.0 % in February.[36] Core inflation, which excludes the prices of fresh food, also jumped by an annual 1.2 % to match expectations following a 1.0 % increase in February.[36]
According to the official report, acceleration in annual inflation stemmed from rise in prices of food and non-alcoholic beverages.[22]
The bank prefers to see annual eurozone inflation at just under 2.0 percent.[12] "Our big problem is to ensure that inflation returns below 2 percent next year," Noyer said in an interview with RTL radio. "We will do whatever is necessary for that," he said.[8]
At around three percent over the last two years, growth in the EU has been robust by historical standards and stronger than in the United States.[14]
Gilles Moec at Bank of America told AFP that comments by Noyer at the Bank of France nonetheless showed "he is genuinely worried about growth in the eurozone. "The second and third quarters could really be on the weak side," Moec said.[12] Apart from statistical reports, a report from the Asian Development Bank showed that emerging East Asian bond markets are set for continued growth, but at a slower pace.[22]
Services confidence is expected to remain steady at last month's reading of 9. In the UK, the Bank of England will release its financial stability report.[27] The central bank said it expected a "deeper and more protracted slowdown" in America to hurt Canadian exports and tighter credit conditions to damp spending at home.[32]
A report from the statistical office INSEE showed that consumer spending of manufactured goods fell 1.7% month-on-month in March, more than the 0.3% decline that was expected.[22] WPP said that growth during March was slower than expected despite strong sales from a resilient U.S. advertising market.[34] Taiwan's Ministry of Economic Affairs said Taiwanese industrial production as well as export order growth slowed in March.[22]
"Manufacturing has dropped quite a bit and that has been the driver of growth in Germany. the euro is off a touch on it," said David Pais, currency strategist at Citigroup.[17] Weak eurozone manufacturing figures also weighed on the single currency after the purchasing managers index fell to 50.8 in April, the lowest since August 2005 and close to the sub-50 level that signals a contraction.[29] The euro was also slowed by the collapse of manufacturing activity in the Eurozone to the lowest in almost three years, registered in April by the PMI index (fallen to 50.8).[19]
Noyer addressed concerns that the ECB would find it difficult to handle the collapse of a large bank with cross- border operations, the newspaper said. Standards in the 15 nations that use the euro should be "harmonized,'' he told the Journal in an interview. [33] The financial account category indicated net inflows of 21 billion euros in February, a combination of 35 billion in net portfolio investment inflows along with a 14 billion euros in net direct investment abroad, the ECB said.[40] "The strength of the euro is a reflection of the dollar's weakness," Bini Smaghi said. "Recent fluctuations are worrying for their potential impact on economic and financial stability.''[30]
Analysts are watching the data for evidence that bank lending is beginning to dry up, amid tightening financing conditions stemming from financial market turbulence and risk repricing. [7] Wednesday will be data-heavy with the release of German employment, European consumer confidence, European inflation data and European employment data.[27] Consumer prices have been rising in Slovakia and across the European Union, driven by higher fuel and food prices, and unemployment remains stubbornly high--11 percent in 2007, compared to the EU average of 7 percent.[6]
The following day's docket holds the greatest potential for a fundamentally-driven run in the majors. The morning brings the advanced reading of first quarter GDP. Oddly enough, the consensus from economists is calling for a 0.5 percent annualized pace of expansion (a tick below the fourth quarter clip) despite a deepening housing recession, a turn in employment and contractions in both the services and manufacturing sectors. Such a moderate forecast opens the market to considerable surprises; but a reaction could be dampened by a FOMC rate decision due later that afternoon. [25] Looking at European employment for April, economists expect the employment rate to remain steady at 7.1%.[27]
In a Reuters poll of 39 economists before the data was released, M3 was expected to grow on average by 10.8 percent.[24] The growth eased from 11.3% registered in the previous month and was lower than the 10.6% growth expected by economists.[36]
'''The relative emphasis between maintaining price stability and growth is modulated as per the prevailing circumstances, and is articulated in the policy statements,''' governor Y V Reddy has said.[3]
UK pay deals remained steady at 3.5 per cent in the three months to March. Pay deals have been at 3.5 per cent in the quarters to January, February and March this year, according to Industrial Relations Services, the pay specialists.[34] On the data front, Statistics Sweden announced that the country's jobless rate rose to 6.3% in March from 6.1% in February.[22]
Three policymakers voted against the proposition, out of which known hawkish members Tim Besley and Andrew Sentance preferred to maintain Bank Rate at 5.25%.[22] The annualized rate is forecasted to fall 2.3% following last year's fall of 0.3%.[27]
This is much like in the U.S. where the Fed is more engaged in fighting a slowdown than in taming inflation. [3] In order to join the currency union countries must meet rigid financial criteria--including limits on public debt and inflation.[6]
Among the Central and Eastern European states, only Slovenia has met the criteria and switched to the euro in 2007. [6] The Swiss franc depreciated vis-''-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0430 level and was supported around the CHF 1.0300 figure. The pair reached its highest level since 3 March.[23]
SOURCES
1. Forex - Dollar steady in afternoon trade in Asia ahead of FOMC meeting next week - Forbes.com
2. European Union business group says strong euro is alarming - International Herald Tribune
3. Will RBI take Fed & ECB route on road to inflation salvation?- Indicators-Economy-News-The Economic Times
4. Trichet says ECB is concerned about impact of'sharp' currency fluctuations - Forbes.com
5. ECB's Stark says current monetary policy contributes to price stability - Forbes.com
6. Euro Skeptics in Slovakia
7. DJ DATA SNAP: Euro-Zone Mar M3 +10.3% On Year Vs +11.3% In Feb - DowJonesNewswires - Onet.pl Biznes - 25.04.2008
8. ECB prepared to raise rates if needed-policymakers | Reuters
9. European government bonds rise as Germany's Ifo confidence survey falls - Forbes.com
10. RT' Business: Money growth eased back in March
11. Dollar gains after record-breaking fall against the euro | Chron.com - Houston Chronicle
12. AFP: ECB holding rates steady in case growth runs out of steam: analysts
13. Eurozone-lead inflation indicator drops in March: ECB- International Business-News-The Economic Times
14. European businesses cautiously optimistic about economic future_English_Xinhua
15. ECB cannot ignore that inflation has reached 'intolerable levels' - board member - Forbes.com
16. AFP: Euro holds close to $1.60 mark
17. FOREX-Euro backs off record high on weak PMI, ECB talk | Markets | Markets News | Reuters
18. ECB talking to banks about rise in euro-zone lending rates - Noyer - Forbes.com
19. AGI News On - EURO: CLOSES BELOW 1. 59 DOLLARS AFTER EXPLANATION ECB
20. FOREX-Euro backs off record high on policymaker talk | Currencies | Reuters
21. Euro slips from record on weak data, ECB talk | Currencies | Reuters
22. RTTNews - Realtime Economic News, Global Economic News and Reports, Asian Economic News, Economic Calendar.
23. U.S. Forex Market Commentary
24. Euro M3 growth slows at sharpest pace since 1993- Global Markets-Markets-The Economic Times
25. Dollar Looking at a Perfect Economic Storm
26. Khaleej Times Online - Euro zone inflation seen easing to 3.4% in April
27. Canadian Economic Press - Welcome
28. Dollar gains after record-breaking fall against the euro - International Herald Tribune
29. AFP: Euro retreats in Asian trade
30. Mixed signals from ECB but market stops betting on further interest hike - European, Business - Independent.ie
31. ECB's Stark says monetary analysis proven to be 'bulwark' for monetary policy - Forbes.com
32. Overview | Economist.com
33. Bloomberg.com: Germany
34. Need to know - Times Online
35. Free Preview - WSJ.com
36. RTTNews - Currency Trading, Currency Market Update, Trading Opportunities, US Market Update .
37. European government bonds recover after Noyer backtracks - Forbes.com
38. Forex - Euro continues to weaken as eurozone proves vulnerable to credit crisis - Forbes.com
39. FOREX-Dollar heads for best month in 2-1/2 years | Currencies | Reuters
40. AFP: Eurozone current account climbs back into surplus: ECB
41. Bloomberg.com: Europe
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