That sinking feeling

January 7, 2014

Euro zone inflation, or deflation, is the focus of the moment.

Germany’s HICP rate fell to 1.2 percent last month, Italy’s hit 0.6 percent and Spain’s just 0.3 in December (not to mention Greece’s -2.9 percent). Today we get the figure for the euro zone as a whole. Forecasts for it to hold at 0.9 percent may now look a little toppy.

It’s too early for any dramatic moves but the European Central Bank, which has a policy meeting on Thursday, may well be pushed into easing policy if inflation refuses to pick up and/or the banks clam up ahead of this year’s health tests.

A shock fall in euro inflation to 0.7 percent prompted an interest rate cut to 0.25 percent in November followed by a chorus of denials that deflation was a threat. ECB chief Mario Draghi adhered to that last week but added that he and his colleagues had to make sure inflation didn’t get stuck in the “danger zone” below one percent.

We pretty much know the state of play, although that does not disguise the differing camps within the Governing Council.
With rates already close to zero, there will be no rush to cut them again, another gush of long-term cheap money for the banks is possible, particularly if the looming bank health tests cause them to tighten up further, but too many ECB policymakers are viscerally opposed to printing money for that to become an option unless deflation seriously took hold.

U.S. Treasury Secretary Jack Lew will visit Paris, Berlin and Lisbon over the next two days. The last time Lew was in Europe he was indirectly critical of Germany, stressing the need for Europe to boost domestic demand. If deflation looks like becoming a threat, the imperative to boost economic activity will come into even more sharp relief.

Lew also described banking union as crucial for the long-term stability of the euro zone. So his views on whether the piecemeal agreement clinched in December is satisfactory to Washington is a key issue.

Lew will hold a news conference with French Finance Minister Pierre Moscovici later. Separately, President Francois Hollande will meet European Commission President Jose Manuel Barroso. Some EU officials have questioned the pace and depth of French labour and pension reforms.

The French economy is in dire need of a fillip. Consumer confidence figures, just out, edged up in December.

It may come today, it may come later in the week but Ireland is about to launch a new syndicated 10-year bond, the first since it exited its bailout in December. Even though the government is already funded into 2015, this will be an important test of confidence and the country’s ability to stand on its own feet. It is expected to try and raise a modest 3 billion euros.

Turkey’s Tayyip Erdogan is in Japan as part of an Asian tour, proclaiming that his country’s gaping current account gap will pose no threat to the economy for the next four or five years. With a new bout of emerging market volatility quite possible as the Federal Reserve starts drawing in its claws, that could well be put to the test.

Turkey’s stock market rose more than 3 percent yesterday having been battered by a corruption scandal that has led to the resignation of three cabinet ministers and questioned the independence of the judiciary and police with reports saying the government removed another 350 police officers from their posts overnight.

Polish Prime Minister Donald Tusk will spell out how his government plans to spend 73 billion euros from EU structural funds over 2014-2022 to create jobs and raise living standards. Tusk may give new growth forecasts and outline policies that would support job creation and families.

The British Chamber of Commerce’s economic survey, out overnight, showed businesses reported strong growth and rising confidence in the last three months of 2013, pointing to quarterly UK growth of around 0.9 percent


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