MacroScope

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.

Expect ECB President Mario Draghi to state a number of times today that inflation expectations are anchored, although quite how one proves that is an open question.

Nonetheless, the tone coming out of the ECB has shifted perceptibly over the past two weeks after Draghi suggested after the ECB’s March meeting that the bank would either do nothing or take bold action should the threat of deflation loom much larger.

Hollande’s search for an elusive winning formula

After a local election drubbing, French President Francois Hollande duly sacked his prime minister last night and tempered his economic reform drive, vowing to focus more on growth and “social justice”. A fuller cabinet reshuffle is expected today.

Interior minister Manuel Valls, anything but a left-wing firebrand whose appointment could stir unrest on the left of the ruling Socialist party, takes the premiership with a mandate to pursue cuts in labour charges for business but also tax cuts to boost consumer spending and employment.

Hollande said France would still cut public spending to pay for a 30 billion euro reduction in labour charges on business, part of a “responsibility pact” with employers he launched in January. But he said Sunday’s elections also showed the need for a “solidarity pact” offering workers tax cuts and assurances on welfare, youth training and education.

G7 test of mettle

Another crunch week in the East-West standoff over Ukraine kicks off today with Barack Obama in the Netherlands for a meeting of more than 50 world leaders at a nuclear security summit in the Netherlands. There, he and his fellow G7 leaders will hold separate talks on Ukraine.

Obama upped the ante on Vladimir Putin last week with sanctions that hit some of his most powerful allies and strayed firmly into Russia’s banking and corporate world. The EU acted more cautiously but is looking at how financial and trade measures would work, getting ready in case Putin escalates the crisis further.

There is certainly no signs of de-escalation. Over the weekend forced Russian troops forced their way into Ukrainian military bases in Crimea and took them over. NATO’s top military commander said Russia had built up a “very sizeable” force on its border with Ukraine and may be eyeing up a region in the ex-Soviet republic of Moldova too.

When is a war not a war?

Is it war if no shots have been fired? The Ukrainians say so but Moscow, its grip on Crimea now pretty much complete, says it is merely protecting its people. The rest of the world and its financial markets watch on very uneasily.

There is virtually no chance of any western military response after Vladimir Putin declared he had the right to invade his neighbour – NATO  expressed “grave concern” but did not come up with any significant measures to apply pressure on. But there will be a diplomatic and economic price to pay.

The rouble tumbled by 2.5 percent at Monday’s open and the central bank has already acted to try and underpin it, raising its key lending rate by 1.5 percentage points although the Russian economy is already in poor shape. The main Russian stock index has plunged by about 9 percent with Gazprom doing worse than that and safe haven German Bund futures have jumped.

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.

ECB under pressure, March move more likely

The European Central Bank meets on Thursday with emerging market tumult bang at the top of its agenda.

It’s probably too early to force a policy move this week – 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.

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.
Euro zone and UK PMI surveys for January will give the latest on the state of Europe’s economic recovery this morning. The Markit/HSBC manufacturing PMI for China has fallen to a six-month low.

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.

Data to shape ECB week

Euro zone service sector PMIs and German inflation (with the euro zone number to follow on Tuesday) will lay the ground for the European Central Bank’s first policy meeting of the year.

The surveys are likely to show the currency bloc ended the year on a reasonably robust note with Germany leading the way as always, Italy and Spain showing signs of life and France looking worryingly weak.

Ireland’s reading is already out and has posted its fastest services growth in seven years. Much more importantly for the world, growth in China’s services industries slowed in December, confirming that the world’s second-largest economy lost steam at the end of last year.

Game of chicken in Kiev

No sign of tensions calming on the streets of Kiev, in fact today we could have a new flashpoint.

Prime Minister Mykola Azarov’s cabinet is holding its weekly meeting in the government building which protesters have blockaded since Monday, paving the way for a possible showdown.

Popular pressure, following President Viktor Yanukovich’s decision to reject an EU trade deal and turn back to Russia, is being matched by the markets, and it is from there that the potential tipping point could come.

Crisis in Kiev

Ukraine’s shock decision to turn its back on an EU trade deal continues to reverberate with mass rallies on the streets of Kiev in protest at President Viktor Yanukovich’s decision.

To try to defuse tensions, Yanukovich issued a statement saying he would do everything in his power to speed up Ukrainian moves toward the EU. Is this another U-turn or mere semantics? The answer is important.

Kiev must find more than $17 billion next year to meet gas bills and debt repayments. Another sovereign meltdown is far from impossible.
Yanukovich is due to embark on a trip to China. Dare he go? And is the opposition cogent enough to threaten him? The call for a national strike will be an acid test.