MacroScope

Deflating euro zone inflation expectations

EThe euro zone is not deflating, it’s just at risk of a too-prolonged period of low inflation, says European Central Bank President Mario Draghi.

Judging by recent evidence, it might be very prolonged, which is bad news for an economy struggling to shift out of low gear.

Inflation held steady at just 0.5 percent in June, well below the ECB’s 2.0 percent ceiling, stuck in what it calls the “danger zone” of below 1.0 percent for nine straight months.

And the latest from the euro zone’s private sector also shows companies are nowhere close to regaining any pricing power.

Several prominent forecasters now say inflation will fall even lower than where it is now.

Erdogan on the move

Turkey's PM Erdogan walks to his plane at Esenboga Airport in AnkaraTurkey’s ruling AK party is due to announce its presidential election candidate. Prime Minister Tayyip Erdogan is widely expected to announce his presidential bid, and then emerge victorious in the polls after a 40-day election campaign. Polls give Erdogan around 55 percent of the vote and a 20 point lead.

Under Erdogan, Turkey has made great strides economically and diplomatically but some if not much of that progress has been tarnished by a crackdown over the past year on anti-government protests and a purge of the judiciary and police in response to corruption charges against his acolytes which the premier says represent a plot by shadowy forces to oust him.

If he wins he is expected to exercise far more power than his presidential predecessor. Aides have said he would rule with a “council of wise men” made up partly of close allies and would oversee top government business, effectively sidelining some ministries and ministers.

Clock ticking

Amid all the furore over David Cameron’s failure to block Jean-Claude Juncker for the top EU job at a summit last week, the bloc’s leaders signed a free-trade pact with Ukraine and said they could impose more sanctions on Russia unless rebels de-escalate in the east of the country by Monday.

In turn, Ukraine president Poroshenko extended a ceasefire by government forces until 10 p.m. local time today.

The Russian economy would contract should the West introduce wide-ranging sectoral sanctions but that would not be a “dramatic” situation, Economy Minister Alexei Ulyukayev said over the weekend.

Spain’s early bath a surprise to economists

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Much the same as economists often struggle to accurately predict data releases, their initial thoughts on how the soccer World Cup will pan out also appear to have been misguided.
While Brazil, the clear favourite to win in a Reuters poll of over 120 football-loving market analysts, is clinging on after a nil-nil draw with Mexico on Tuesday it’s a different story for Spain.

 

They were a firm favourite to appear in the final against the home nation but crashed out of the tournament in spectacular style on Wednesday after a shock 2-0 defeat by Chile.

“It was very disappointing last night,” said Tom Rogers at Oxford Economics, who had picked the Spaniards to lose in the closing match to Brazil.

Bank of England Minutes give rate debate another twist

 

carney.jpgSpeculation about when the Bank of England hikes interest rates took a new twist on Wednesday after minutes from the June policy meeting struck a less hawkish tone than the Governor did in a speech late last week.

Mark Carney caused a few shockwaves last week when he said rates could rise sooner than expected, sending sterling above $1.70 to a near five-year high

It also led to newspaper headlines like “Carney delivers strongest hint yet that interest rates could rise before the end of the year” and “UK interest rates to rise this year and could peak at 5 percent“.

A call to arms

The prospect of U.S. and Iranian intervention in Iraq looms larger.

Baghdad has asked the United States for air support to counter Sunni militants who have seized major cities in a lightning advance that has routed the Shi’ite-led government army. And Iranian President Hassan Rouhani has signalled that Tehran was prepared to intervene to protect Iraq’s great Shi’ite shrines.

As of last night, ISIL fighters were in control of three-quarters of the territory of the Baiji refinery north of Baghdad and some international oil companies were pulling out workers.

Even if the two adversaries find common cause in Iraq, it doesn’t appear to have transferred to negotiations over Tehran’s nuclear programme, for which the West has imposed stiff sanctions.

Of Iraq and Ukraine

Barack Obama’s message that any military support for Iraq’s besieged government is contingent on Prime Minister Nuri al-Maliki taking steps to broaden his Shi’ite-dominated government may be having an impact.

Just hours after Maliki’s Shi’ite allies vowed to boycott any cooperation with the biggest Sunni party and his government had accused Sunni neighbour Saudi Arabia of backing “genocide”, Maliki broadcast a joint appeal for national unity alongside Sunni critics of his Shi’ite-led government.

They have tried and failed to come together before but Shi’ite, Sunni and Kurdish leaders met behind closed doors and then stood somewhat frostily before the cameras as Maliki’s predecessor read a statement denouncing “terrorist powers” and supporting Iraqi sovereignty.

Weak UK inflation casts doubt on interest rate hike this year

 

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Bank of England Governor Mark Carney shocked markets last week, saying interest rates could rise sooner than expected.

At first glance, the latest UK inflation data suggest they might not.

Inflation has nearly halved to 1.5 percent in May from 2.9 percent last June. And wage inflation is much lower.

While still well above the euro zone, where inflation has tumbled to 0.5 percent, keeping alive the real risk of deflation, the latest UK inflation rate fell below even the lowest forecast in a Reuters poll.

Common cause for Washington and Tehran in Iraq?

Iraq is going up in flames and there appears to be no question of the West putting boots back on the ground in contrast to 2003 when the United States and Britain invaded to topple Saddam Hussein and set in train a decade of chaos that has now exploded again.

Iraq’s most senior Shi’ite Muslim cleric has urged his followers to take up arms against a full-blown Sunni militant insurgency to topple Shi’ite Prime Minister Nuri al-Maliki. The chances of ISIL militants taking heavily armed Baghdad are slim but that doesn’t mean conflict will not continue and, with Iraqi Kurdish forces seizing control the oil hub of Kirkuk just outside their autonomous enclave in the north, the prospect of the country splitting along sectarian lines is real.

Over the weekend, ISIL’s advance on Baghdad slowed but spread northwest, with Sunni militants seizing Tal Afar, a town close to the Syrian border.

UK rate rise this year? Possible, but not certain yet

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“It could happen sooner than markets currently expect.”

That was the bomb of a headline Bank of England Mark Carney dropped in a speech on Thursday that suggested a significant change in tone at the bank.

So far, Carney has seemed comfortable with keeping rates at a record low of 0.5 percent for another year. That has been the forward guidance markets have been following.

But are many now convinced that Bank Rate will go up earlier?

Not yet, but some.

Given that Carney’s remarks come only a month after he outlined a dovish outlook for rates in the May Inflation Report, he took many by surprise, sending sterling to just under $1.70 and rallying to less than 80 pence per euro.