Draghi engineers August lull, but wait for September

August 10, 2012

Having not enjoyed a summer lull for a good few years, we might as well take advantage of this one which appears set to last for another couple of weeks yet (famous last words).

European Central Bank President Mario Draghi’s pledge to do whatever it takes to save the euro zone continues to underpin markets who view a litany of grim economic evidence as increasing the likelihood of further central bank action, not just from Europe but China and the United States too, thereby leaving them somewhat becalmed. (Remember the Greenspan put?)

The ECB chief’s intervention remains strictly in the realms of the rhetorical for now. The proof will come in September at the earliest – an ECB policy meeting in the first week is likely to set out the parameters as to how it might act to lower Spanish and Italian borrowing costs, a week later the German constitutional court rules on the viability of the euro zone’s permanent rescue fund, then euro zone finance ministers gather in Cyprus for a key meeting. Also in September, the troika of Greek lenders will return to decide whether Athens has done enough to secure its next bailout tranche.

With Draghi’s verbal intervention alone decimating short-end Spanish bond yields, there may be no rush to action. The counter argument to that is that Spain’s 10-year borrowing costs remain perilously close to 7 percent and it faces some fearsome looking debt refinancing bills in October.

Either way, the rest of August looks short of cues or major market impulses.

However, a blockbuster week for good old-fashioned economic data is coming up. Tuesday sees the release of Q2 GDP reports for the euro zone and nearly all its constituent parts, including Germany, which also sees the release of its forward-looking ZEW sentiment survey. Having flatlined in the first quarter, all the recent evidence suggests the euro zone must have contracted in the second although Germany may still have eked out some growth. It may be best to avert your gaze from some of the other numbers. We already know that Britain’s recession deepened in the second quarter and a raft of UK data over the week is unlikely to lift the gloom. We get parallel GDP figures for central and eastern Europe too, which are unlikely to be much prettier.

A deteriorating economy and dissipating inflation pressures may well make the ECB feel more comfortable about acting on the premise that its loose monetary policy is not feeding through to all corners of the euro zone, namely those countries whose borrowing costs remain sky high .. But not before September.

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