MacroScope

Putin desperately seeking gas deal

Ukraine seems to be in something of a holding pattern before Sunday’s election though the question of how those polls can be securely conducted in parts of the country where pro-Russian rebels want to secede remains a very live one.

We reported yesterday from Donetsk where officials working to prepare for the May 25 presidential poll described intimidation and threats from separatists which prompted them to shut down their office. The interior minister in Kiev has said it would be impossible to hold “normal elections” in the regions of Donetsk and Luhansk which are home to nearly 25 percent of the electorate.

Moscow said yesterday that President Vladimir Putin had ordered Russian forces near Ukraine’s eastern border back to their bases, though NATO and the United States said they saw no sign of a pullback.

Putin is in China, hoping to sign a long-sought deal to supply it with gas. Both sides have yet to agree on a price. Gazprom says the talks are now in their “final stage” though it may have to lower its sights given the prospect of it losing business in Europe has rather strengthened Beijing’s negotiating hand.

If a deal was sealed it could re-embolden Putin in terms of his dealings with the West although revenues from China would take some years to start flowing.

Why EU elections can matter

Some interesting action over the weekend: in a foretaste of this week’s EU elections, Greece’s leftist, anti-bailout Syriza party performed strongly in the first round of local elections on Sunday, capitalizing on voter anger at ongoing government austerity policies.

If it did even better in the EU polls it could threaten the ruling coalition and tip Greece back into turmoil just as there are signs that it has turned the corner.

Bank of England Governor Mark Carney sounded dramatically more alarmed about Britain’s housing market, saying it posed the biggest risk to the economy and harboured deep structural problems.

France flatlining

We get a flood of EU GDP reports today. Germany’s figure, just out, has marginally exceeded forecasts with quarterly growth of 0.8 percent but France is underperforming again and stagnated in the first three months of the year, missing estimates of 0.2 percent growth.

Robust German growth has been driven largely by domestic demand, which could help its European peers with their exports. Where all that leaves the overall euro zone figure, due later, remains to be seen. The bloc is predicted to have expanded by 0.4 percent.

Spain has already come in with 0.4 percent quarterly growth and others could pick up too so once again France is looking like one of the sicker men of Europe. High debtors Italy and Portugal are expected to eke out at least some growth.

Over to the FPC to direct Britain’s Housing Boom – The Sequel

Bank of England Governor Mark Carney has securely parked responsibility for controlling Britain’s booming housing market with the Financial Policy Committee.

While presenting the Bank’s quarterly Inflation Report Carney said the first line of defence against risks from the housing market would be to restrain mortgage lending – something that is in the FPC’s remit – rather than adjusting monetary policy and driving up interest rates.

House prices are expected to rise 8 percent this year according to a Reuters poll this week, not far off the 11 percent average pace seen in the year to April.

Bank of England sticks to its view and analysts, some defiantly, stick to theirs

Bank of England governor Mark Carney gestures during the bank's quarterly inflation report news conference at the Bank of England in LondonMark Carney has delivered what is probably the clearest message on the trajectory of interest rates from the Bank of England for a very long time.

There was no more  talk of “forward guidance”, but the guidance was pretty clear: no change to the view, on track for a first rate hike in a very gradual series, starting around a year from now. Nothing to see here.

There were a few grey areas, notably whether wage inflation will pick up significantly (it hasn’t yet) and if the elusive appearance of meaningful British productivity growth ever takes place (which will prevent the labour market from generating too much inflation).

Don’t stop fighting inflation, banks tell Brazil policymakers

Brazil's Central Bank President Tombini reacts during a ceremony to announce Measures of Consumer Protection at the Planalto Palace in Brasilia

A small piece of good news on Brazil’s inflation rate last week probably gave the central bank its best pretext yet to finally stop raising interest rates after more than one year of non-stop increases. But economists still think it’s too early to proclaim “mission accomplished”.

Keeping interest rates at the current 11 percent will do little to reduce inflation in the months ahead, economists at Itau Unibanco, Santander and Bank of America Merrill Lynch said, despite a smaller-than-expected increase in consumer prices last month.

Their pessimistic outlook contrasts with the central bank’s, which has signaled it is willing to stop raising rates soon by saying that the 375-point increase since April last year was “sizable” and is yet to have a meaningful effect.

Smoke signals from the Bank of England

Given the silence that attends Bank of England policy meetings which result in no change of course, today’s quarterly inflation report is the main chance to hear the latest thinking. Governor Mark Carney will talk to the media for an hour or so after its release.

The ongoing strength of economic data means the odds of a first interest rate rise this year are narrowing and one could certainly come before May 2015 elections, an unwelcome prospect for the government.

The main imponderable is how much spare capacity there is in the economy, which would allow further growth without feeding inflation pressures. There are differing views on that with no one quite sure how much activity was permanently destroyed by the financial crisis.

Drop in German investor morale may have called the peak in growth

A BMW employee assembles a BMW motorcycle at the company's factory in BerlinEurope’s growth engine may be on the verge of gearing down, according to an indicator of German investor morale that recorded its biggest drop in one and a half years on Tuesday.

For a euro zone economy that is broadening, but still relying heavily on Germany for growth, as well as inflation that is dangerously low and well below target, that may add another line to the European Central Bank’s worry sheet.

The ZEW institute’s index of analyst and investor sentiment fell for the fifth month in a row to 33.1 in May from 43.2, coming in well below the most pessimistic forecast of 37.1 in a Reuters poll.

Strong euro may be a monster Draghi can’t tame

Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in FrankfurtECB President Mario Draghi may have created a monster when he declared nearly two years ago that he will do “whatever it takes” to save the euro.

Given that Draghi has now openly pegged the outlook for monetary policy at least partly to the exchange rate, the prospect of both short-term and long-term investors buying the euro is a worrying obstacle for policy.

A rampant euro is anathema to the ECB’s narrow mandate, which is aimed squarely at getting very low inflation back to its target of just below 2 percent. A stronger euro keeps a lid on the price of everything the euro zone imports from abroad. And it makes everything it exports seem relatively more expensive.

Russian sanctions … and France

After the EU widened its sanctions to include Vladimir Putin’s deputy chief of staff, the commander of Russian paratroopers and two Crimean energy firms, Ukrainian prime minister Yatseniuk is in Brussels today for talks. The EU is looking to shore up the situation to allow national elections to take place on May 25 and, along with Washington, has set any disruption of that vote as a red line.

Vladimir Putin, perhaps fearing significantly tougher sanctions, has belatedly given rhetorical support to the election. Whether it can legitimately take place given the chaos in parts of the country remains an open question.

The latest additions bring to 61 the number of Russians and Ukrainians the EU has slapped with asset freezes and visa bans and for the first time it has targeted companies after foreign ministers agreed to broaden the scope of sanctions. However, only broader trade and financial sanctions would really bite and on that, Washington is much keener than Europe which is heavily dependent on Russia for its energy needs.