MacroScope

ECB – stick or twist?

 

The European Central Bank meets today with emerging market disorder high on its agenda.

It’s probably  too early to force a policy move – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January, way below the ECB’s target of close to but below two percent.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.

But what to do? A small interest rate cut from 0.25 percent to somewhere just above zero is hardly going to be a game changer and the ECB has already said it won’t prime banks with long-term cheap money again unless they commit to lend into the real economy.

With stress tests looming and those same banks being told to deleverage and build up capital that is anything but straightforward though given the downward pressure the bank tests are likely to exert on lending there is certainly a case for an LTRO if banks do commit to pass the money on to businesses.

PMIs on the up

Slowing growth in the Chinese and U.S. factory sectors earlier this week did nothing to soothe frayed market nerves and put a firm focus on today’s service sector PMI surveys in Europe along with the equivalent U.S. report and a weekly jobless number there.

While the world’s two largest economies suffered a hiccup, euro zone factories had their best month since mid-2011 in January. But it is the service sector that dominates in Europe. Flash readings, which are not usually revised much, showed the euro zone services reading hit a four-month high with France lagging Germany again although even its number rose. Today we’ll get the first numbers for Italy, Spain and Britain.

The reports will be the last meaningful pieces of evidence the European Central Bank gets to chew over before Thursday’s policy decision. Emerging market tumult and its possible effect on already vanishing inflation will be bang at the top of its agenda.

Ker-pow! Turkey leaps to lira’s defence

 

Turkey’s central bank bit the bullet last night, despite Prime Minister Tayyip Erdogan calling for it to hold firm just hours beforehand, and what a bite it was.

After months trying to avoid a rate rise it put 4.25 full percentage points on the overnight lending rate, taking it to 12 percent. No one can accuse Governor Basci of being under the government’s thumb now. The move vaulted expectations.

The big questions for Turkey are what such a magnitude of tightening, which the central bank said would persist, does to a faltering economy and how Erdogan, who is on a two-day trip to Iran, reacts.

Emerging wobbles

This week will go a long way to determining whether a violent emerging market shake-out turns into a prolonged panic or is limited to a flight of hot money that quickly fizzles out.

On our patch, Turkey is under searing pressure, largely of its own making and that is the theme here. Yes, the Federal Reserve’s slowing of money printing is the common factor, prompting funds to quit emerging markets, but it is those countries with acute problems of their own that are really under the cosh.

Prime Minister Tayyip Erdogan’s purging of the police and judiciary in response to a corruption inquiry that has got uncomfortably close to him has unnerved investors. The central bank, under political pressure, has not raised interest rates but is instead burning through its reserves to defend the lira with only limited success.

Davos Day Two — Rouhani, Lew and Lagarde

Day one in Davos showed the masters of the universe fretting about Sino-Japanese military tensions, the treacherous investment territory in some emerging markets and the risk of a lurch to the right in Europe at May’s parliamentary elections which could make reform of the bloc even harder.

Today, the focus will be on Iranian President Hassan Rouhani (and his main detractor, Israel’s Netanyahu). Presumably he’s there to woo the world of commerce now sanctions are to be relaxed in return for Tehran suspending enrichment of uranium beyond a certain level. Anything he says about Syria’s peace talks, which have so far been more hostile than conciliatory, will instantly be headline news.

Other big name speakers are U.S. Treasury Secretary Jack Lew, IMF chief Christine Lagarde, who is going around warning about the threat of European deflation, Australian premier Tony Abbott, who is running the G20 this year, and a session featuring the BRICS finance ministers.

Iran and Japan in focus at Davos

Lots of action in Switzerland today with the annual get-together of the great and good at Davos getting underway and Syrian peace talks commencing in Montreux.

On the latter, few are predicting anything other than failure, a gloom that Monday’s chaotic choreography did nothing to dispel.
U.N. chief Ban Ki-moon Ban first offered Iran a seat at the table, prompting a threat to pull out by Syrian opposition groups which led to Washington demanding the invitation to Tehran be withdrawn. In the end, Ban did just that.

The release of thousands of photographs apparently showing prisoners tortured and killed by the government reinforced opposition demands that Bashar al-Assad must quit and face a war crimes trial. The president insists he can win re-election and wants to talk about fighting “terrorism.”

The Iranian thaw

A landmark deal curbing Iran’s nuclear programme in return for a loosening of sanctions appears to be underway, an agreement intended to buy time for a permanent settlement of a decade-old standoff.

Under the deal, Iran must suspend enrichment of uranium to a fissile concentration of 20 percent. An Iranian official has just said Tehran will start its suspension of uranium enrichment up to 20 percent in a few hours.

EU foreign ministers meet in Brussels and are expected to suspend some sanctions against Iran in line with the Nov. 24 interim agreement if as expected, the United Nations’ nuclear watchdog confirms Tehran is meeting its end of the bargain.

EU ratings day: Portugal modest thumbs up, Dutch unscathed, Ireland awaited

Friday is European ratings day since EU rules took force requiring ratings agencies to say precisely when they will make sovereign pronouncements and to do so outside market hours.

S&P has already shifted its outlook on Portugal’s rating from creditwatch negative to negative. The rating remains at BB, one notch below investment grade. That sounds obscure but it’s actually something of a vote of confidence though probably short of what the market had been hoping for.

The ratings agency said it expects Lisbon to meet its budget deficit target this year based “partly on indications that the economy has been showing signs of stabilization since mid-2013” – another fillip as Lisbon tries to follow Dublin out of the bailout exit door this year.

Hollande talks the talk

Francois Hollande managed to bat off questions about his private life (how successful he is in holding that line depends on the attitude of the French media which yesterday was nothing but respectful) and focus instead on a blizzard of economic reforms.

Skating past the French president’s call for an Airbus-style Franco-German energy company which left everyone including the Germans bemused, there was some real meat.

Hollande reaffirmed his “responsibility pact” to cut taxes and red tape for companies, saving them 30 billion euros, in return for a commitment to hire more people and increase training.
He also promised a further 50 billion euros in spending cuts in 2015-17 on top of a planned 15 billion this year, saying they could be achieved by making national and local government more efficient while preserving France’s generous social model.

Hollande’s moment of truth

This afternoon, French President Francois Hollande will expand upon his New Year announcement that French companies who agree to hire more workers could pay lower labour taxes in return and find themselves less tied up in red tape. Unemployment is running near to 12 percent and Hollande’s vow to get it falling by the end of 2013 fell short.

Unfortunately, the announcement has been eclipsed by his threat of legal action after a French magazine reported he was having an affair with an actress. France tends to overlook its politicians’ peccadilloes but with the economy in a hole, Hollande risks facing the charge that he should be focusing squarely on that.

To complicate matters his partner, Valerie Trierweiler, has been admitted to hospital following the reports. She will stay there for a number of days yet.
Given this is one of only two news conferences that Hollande has promised to give each year it’s hard to see how he can avoid it being hijacked by his personal life. As boxing promoter Don King was fond of saying: there are two chances, slim and none and Slim just left town.