And the headlines read:
Sharp euro zone inflation drop, record joblessness add to ECB conundrum (Reuters)
EU sees ‘hope’ but also lower growth (BBC)
Euro zone economy turns corner, but growth, inflation subdued: EU executive (Reuters)
Well, the downward revision of growth from 1.2% to 1.1% is certainly not jaw-dropping. But is it enough to spark a subtle shift in sentiment that generates a more fragile consensus on the eurozone?
The joblessness is no surprise. As it has been in the US, unemployment will be a critical impediment to the eurozone’s economic recovery. Spanish utility Gas Natural Fenosa has particularly acknowledged the depressed demand in Spain and the nearby areas. It’s due very much to the severe unemployment situation. Gas Natural seeks to make its progress and profit in Latin America in the coming years because the outlook for economic growth in the eurozone remains grim.
But perhaps the most important piece of the headlines to be pulled out is the inflation data. We know what subdued inflation means in this era of monetary accommodation: more accommodation.
Does that mean another LTRO (Long-Term Refinancing Operation) is right around the corner, the same corner around which the eurozone economy will supposedly turn?
Doubtful, at this stage. But don’t abandon the idea completely. If things get nasty, the European Central Bank will need to do something to help re-recapitalize a financial system built on crummy collateral.
Instead, what’s more likely in the interim is the strategy du jour for central banks: talk the market to sleep.
The ECB’s rhetoric, perhaps when they meet later this week, in light of subdued inflation, will signal:
Economic activity shows stabilization but still has room for improvement
The central bank has room to provide additional support measures IF needed without fear of generating inflation or asset bubbles
In other words: don’t worry about the economy. But if you do, remember we’re there to backstop it … so don’t worry about the economy.
Ok. Got it. More accommodation. Woo hoo. So what?
So, barring any real shocks to the financial system, real or perceived, we’re left to juxtapose expectations for the European Central Bank and the Federal Reserve.
In the weeks following the agreement reached on the US debt ceiling, market expectations shifted mightily into believing Federal Reserve tapering was to be long-delayed. Decent US economic data is surely to erode that enthusiasm and expectations will then shift back to believing tapering is on its way in.
Assuming I’m right about the inevitable shift in Fed expectations, and the ECB’s further-accommodation-if-needed rhetoric, the resulting change in yield differential will be US dollar supportive.
And that seems appropriately timed, since in just the last few weeks predictions for the US dollar’s demise have ramped up noticeably. And this story about South Africa diversifying their currency reserves is sure to validate the bears’ collective growl.
The euro may recoup some of its recent sharp losses in the coming days. But it could have very likely already made it through a turning point of its own, one that sends the value of the euro much lower in coming months.
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