MacroScope

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.

To compound France’s problems a public sector strike has been called by the hardline FO labour union over civil service pay freezes – a reminder of the difficulties of enacting economic reform.

The silver lining is the absence of pressure from the markets with borrowing costs for many euro zone countries at record lows. France will sell 7-8 billion euros of fixed-rate, medium-term bonds and 1.0-1.5 billion euros of inflation-linked bonds later.

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.

Ukraine fissure

Pro-Moscow rebels declared a resounding victory in Sunday’s referendum on self-rule for eastern Ukraine, with some saying that meant independence and others eventual union with Russia. On the ground, fighting appears to be getting increasingly out of control.

The EU declared the referendum illegal but separatist leaders in eastern Ukraine may use the vote to formalise a split with Kiev. Nearly 90 percent of voters in Donetsk, the larger of two eastern regions where a plebiscite was held, voted for self-rule, the head of the separatist election commission there said.

There are signs of alarm even in Moscow with Vladimir Putin calling last week for the referendum to be suspended, perhaps fearing tougher sanctions from the West. Washington and the EU have set any disruption of Ukraine’s May 25 national election as their red line. Putin has belatedly given rhetorical support to that vote. Whether it can legitimately take place given the chaos in parts of the country remains an open question.

Will sanctions bite?

Financial markets may view the latest sanctions against Russia as feeble, but the reaction from Moscow – Vladimir Putin threatened to reconsider Western participation in energy deals and his foreign minister, Sergei Lavrov, said they were the work of weak politicians – suggests otherwise.

Russia’s top oil producer, Rosneft, will release first-quarter financial results after its boss and close Putin ally Igor Sechin was put on the U.S. sanctions list. Yesterday, energy giant Gazprom – whose chief escaped censure – said further Western sanctions over Ukraine could disrupt its gas exports to Europe and hit its business and shares.

The International Monetary Fund will report on its regular mission to Russia. On Tuesday, the Fund said it was preparing to cut its growth forecast for the second time in a month. Many are now talking about a recession this year and capital outflows exceeded $60 billion in the first quarter.

More hope than conviction for euro zone inflation rebound

ECB President Mario Draghi has a friend in euro zone economists of late. They tend to line up and take his view, at least when it comes to forecasting inflation.

There is no serious risk of deflation in the euro zone, nearly every one of them says, and from here onward, euro zone inflation will only be higher than the March trough of 0.5 percent.

That is the line you need to take if you are not yet willing to say that the central bank, which has chopped policy rates all the way to the floor, is more likely than not to print money to get out of the mess.

Obama impatient with EU over Russia

The G7 has said tougher sanctions on Russia could be imposed as soon as today. EU ambassadors  are holding an emergency meeting in Brussels.

The EU will extend travel bans and asset freezes to more people involved in the Ukraine intervention. For now, Washington is treading the same path though maybe more explicitly targeting Vladimir Putin’s “cronies”.

Barack Obama is already looking ahead to a third round of measures and hinted at impatience with Europe, saying there had to be a united front if future sanctions on sectors of the Russian economy were to have real bite.

Talking the talk

European Central Bank President Mario Draghi delivers a speech in Amsterdam which will fixate the markets following his recent statement that a stronger euro would prompt an easing of monetary policy.

Most notably via his Clint Eastwood-style “whatever it takes” declaration the best part of two years ago, Draghi has proved to be peerless in the art of verbal intervention. But even for him there is a law of diminishing returns which may require words to be backed up with action before long. 

In the 12 days since he put the euro firmly on the ECB’s agenda, the currency has actually weakened a little and certainly shied away from the $1.40 mark which many in the market see as a first red line for the euro zone’s central bank. That is probably because investors expect action from the ECB  soon and if so, there are good reasons to think they may be wide of the mark.

To QE or not to QE?

ECB Vice-President Vitor Constancio testifies to the European Parliament prior to attending the IMF Spring meeting in Washington at the back end of the week along with Mario Draghi and other colleagues. Jens Weidmann, Yves Mersch and Ewald Nowotny also speak today.

There has undoubtedly been a change in tone from the ECB, which is now openly talking about printing money if inflation stays too low for too long (no mention of deflation being the required trigger any more). Even Bundesbank chief Weidmann has done so.

Last week, Draghi made it sound as if really serious thought was being given to how to do it. He raised the prospect of buying private sector assets, rather than government bonds as other central banks have. The question is whether he is trying to talk the euro down or whether the central bank is now more alarmed, and therefore deadly serious.

Good news for Greece?

Unemployment is sky high, national debt is not far short of double the size of an economy which is still shrinking and its ruling coalition has a wafer-thin majority, yet there are glimmers of hope in Greece.

Having finally struck a deal with the EU and IMF to keep bailout loans flowing, Athens is preparing to dip its toe back into the bond market with a five-year bond for up to 2 billion euros.

The government has not said when the syndicated issue might be launched but having mandated banks for the sale the likelihood is sooner rather than later. It’s a remarkably quick return two years after a debt restructuring which was essentially a default.

Reasons to do nothing

It’s ECB day and the general belief is that it won’t do anything despite inflation dropping to 0.5 percent in March, chalking up its sixth successive month in the European Central Bank’s “danger zone” below 1 percent.

The reasons? Policymakers expect inflation to rise in April for a variety of reasons, one being that this year’s late Easter has delayed the impact of rising travel and hotel prices at a time when many Europeans take a holiday. Depressed food prices might also start to rise before long.

More fundamentally, they do not see any signs of deflation psychology taking hold, whereby businesses and consumers defer spending plans in the expectation that prices will cheapen.