MacroScope

Euro zone inflation to fall further?

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Euro zone inflation is the big figure of the day. The consensus forecast is it for hold at a paltry 0.5 percent. Germany’s rate came in as predicted at 0.8 percent on Wednesday but Spain’s was well short at -0.3 percent. So there is clearly a risk that inflation for the currency bloc as a whole falls even further.

The Bundesbank has taken the unusual step of saying wage deals in Germany are too low and more hefty rises should be forthcoming, a sign of its concern about deflation. But the bar to printing money remains high and the European Central Bank certainly won’t act when it meets next week. It is still waiting to see what impact its June interest rate cuts and offer of more long-term cheap money to banks might have.

German retail sales, just out, have risen 1.3 percent on the month in June after a fall in May.

One problem for the ECB will be how to remain in ultra-stimulative mode once U.S. interest rates start to rise. The Federal Reserve is on course to end its QE programme in October and repeated its message yesterday that is in no hurry to raise interest rates.
No tightening is expected before mid-2015 but as the realization grows that it is coming, it could start to have an impact. Strong U.S. GDP data yesterday and the Fed’s upgrading of its assessment of the U.S. economy pointed in that direction. There is little chance of euro zone long-term interest rates decoupling from U.S. ones if they start rising.

UK consumer confidence fell for the first time in six months in July, according to an overnight survey from GfK. The Nationwide building society said UK house prices rose at their slowest pace in 15 months in July and Bank of England policymaker Ben Broadbent said the edge was coming off the housing market. But he said he saw a case for an earlier rate rise though any tightening cycle would be “limited and gradual”.

EU cuts off Russian banks, puts ball in Moscow’s court

Russia's President Vladimir Putin talks to reporters during a meeting in Brasilia

True to its word, the EU agreed sweeping sanctions on Russia yesterday, targeting trade in equipment for the defence and oil sectors and, most crucially, barring Russia’s state-run banks from accessing European capital markets. The measures will be imposed this week and will last for a year initially with three monthly reviews allowing them to be toughened if necessary.

There was no rowing back from the blueprint produced last week – having already agreed to exempt the gas sector – and the United States quickly followed suit, targeting Russian banks VTB, Bank of Moscow, and Russian Agriculture Bank, as well as United Shipbuilding Corp.

That is important. Both sides are striving to shut down alternative sources of capital for Russia’s financial sector although there has already been some reaching out to Asia. Gazprombank held a two-day roadshow with fixed-income investors in Seoul last week.

Brazil’s economy: not as bad as it looked?

Brazil's President Rousseff looks on during a news conference to present the balance of the 2014 World Cup in Brasilia

Brazil’s economy may have grown by 3 percent in 2012, three times as much as originally reported, according to an ongoing review of GDP data that could solve one of the biggest economic puzzles since the global financial crisis.

If accurate, estimates from local consultancy LCA would help explain why unemployment remained so low and consumer prices failed to ease when Latin America’s economy looked so weak.

It would also suggest that President Dilma Rousseff and the central bank might have jumped the gun as they slashed interest rates and offered dozens of costly subsidies and tax cuts to jump-start an economy that may not have needed any stimulus at all.

Moment of truth for EU sanctions

The logo of Russia's top crude producer Rosneft is seen in Moscow

President Barack Obama and the leaders of Germany, Britain, France and Italy agreed on a conference call last night to impose wider sanctions on Russia’s financial, defence and energy sectors.

EU ambassadors are meeting today and are expected to target state-owned Russian banks and their ability to finance Moscow’s faltering economy.

European Council President Herman Van Rompuy has written to EU leaders asking them to authorise their envoys to complete an agreement by the end of today. That would avoid the need for leaders to hold a special summit to approve the sanctions.

Still room for improvement with the BoE’s forward guidance, says IMF

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There was plenty of support for the Bank of England’s stance on interest rates from the International Monetary Fund in its latest report on the British economy.

But it seemed a little less sure on how forward guidance – the Bank’s cornerstone policy since Governor Mark Carney took charge last year – has fared so far.

While it still backed forward guidance as a step towards greater transparency, the IMF’s report posed two questions: How effective has forward guidance been, and what improvements could be made?

The long and winding road to sanctions

Russia's President Vladimir Putin talks to reporters during a meeting in Brasilia

If it’s true to its word, the European Union will impose sweeping new sanctions on Russia this week, targeting state-owned Russian banks and their ability to finance Moscow’s faltering economy.

EU ambassadors will continue discussions on the detail of new measures, most significant of which would be banning European investors from buying new debt or shares of banks owned 50 percent or more by the state.

An embargo on arms sales to Moscow and restrictions on the supply of energy and dual-use technologies is also on the table but it looks like restrictions to supplying technology to Russia will include oil but exclude the gas sector.

EU slowly tightens screw

A coffin of one of the victims of Malaysia Airlines MH17 downed over rebel-held territory in eastern Ukraine, is carried from an aircraft during a national reception ceremony at Eindhoven airport

The EU is slowly tightening the screw on Russia, with senior officials proposing yesterday to target state-owned Russian banks in its most serious sanctions so far. Ambassadorial talks on how precisely that is to be done continue today and the measures are likely to be enacted next week.

One key proposal is that European investors would be banned from buying new debt or shares of banks owned 50 percent or more by the state. These banks raised almost half of their 15.8 billion euro capital needs in EU markets last year. That is a big deal and there are increasing signs of investors turning their back on Russia lock, stock and barrel. However, with its giant FX reserves, the central bank can provide dollars to fund external debt for a considerable period of time.

The ambassadors did agree to add more people and entities to the EU’s asset freeze list, using expanded criteria including Russian companies that help to undermine Ukraine’s sovereignty. The 15 individuals and 18 entities, half of which are companies, will be named today. Russian shares are down about 1 percent in early trade.

A dissenting voice

A train carrying the remains of the victims of Malaysia Airlines MH17 arrives in Kharkiv

Interesting intervention from former Russian finance minister Alexei Kudrin late yesterday who warned that Russia risked isolation and having its efforts to modernize derailed.

That sort of internal criticism is rare but Kudrin has done so before without censure which suggests Vladimir Putin is – or has been – willing to hear it. Kudrin added that Moscow should not intervene militarily in eastern Ukraine.

EU foreign ministers came up with more promises of tougher action against Russia without quite showing the colour of their money. Meeting in Brussels they discussed restricting Russian access to European capital markets, defence and energy technology, asking the executive European Commission to draft proposals this week.

EU on Russia sanctions: slowly, slowly

Ukraine's President Poroshenko and Dutch ambassador to Ukraine Klompenhouwer commemorate victims of Malaysia Airlines Flight MH17 outside the Dutch embassy in Kiev

EU foreign ministers meet to decide how precisely to deploy sanctions agreed 10 days ago to hit Russian companies that help destabilise Ukraine and to block new loans to Russia through two multilateral lenders.

The EU foreign ministers are tasked with preparing a first list of people and entities from Russia that would be targeted. The number of individuals and companies to be penalized is up for grabs so there is scope to adopt a tougher posture.

The public statements of EU leaders have made it sound like a more dramatic move is possible. Could that be the “sectoral” sanctions that Washington has pushed for which could deliver a really serious blow to the already flatlining Russian economy? Well no, not yet. That would require another summit of leaders. The next one is set for the end of August although an emergency meeting is not out of the question and today’s meeting could give a nod in that direction.

Acid test of EU’s resolve over Russia

Emergencies Ministry member walks at the site of a Malaysia Airlines Boeing 777 plane crash near the settlement of Grabovo in the Donetsk region

EU leaders said over the weekend they would be prepared to impose tougher sanctions on Russia, giving Vladimir Putin one more chance to douse the violence in eastern Ukraine and help investigators do their work at the site of the crashed Malaysian airliner or face the consequences.

A statement from the British government said Germany’s Angela Merkel, Britain’s David Cameron and France’s Francois Hollande agreed on a telephone call that their ministers should be ready to announce a fresh round of sanctions at a meeting of the European Union’s Foreign Affairs Council on Tuesday.

There is already scope to toughen measures announced last week to hit Russian companies that help destabilise Ukraine and to block new loans to Russia through two multilateral lenders. The EU foreign ministers are tasked with preparing a first list of people and entities from Russia that would be targeted. The number of individuals and companies to be penalized is up for grabs.