ECB is the name, Vigilance the Game
Not much news nor gory suprises for investors last Thursday as the ECB chose to hold (Q&A and statement here) the main refi rate 3.75% at the meeting in Dublin. Meanwhile of course, we should be looking towards June where the ECB through its standard deployment of newspeak à la Frankfurt hinted to investors and market observers that rates expectedly would go up to 4% come June. So, nothing surprising here really. Consequently, as I also noted in my latest entry on the Eurzone we should really try to look beyond June. I also carfully noted that I expected the ECB to find it increasingly more difficult to justify the continuation of the hiking process on the back of an appreciating Euro vis-à-vis the Dollar and the moderate slowdown in terms of real economic variables. On the former account the Eur/Usd is of course pretty volatile within the band of 1.35 and 1.37 at the moment as investors are betting for against the narrowing of interest differentials between the Fed and the ECB. We know how the ECB will go from here with Thursday's interest rate meeting but so far the Fed is standing fast. Of course, if those Q1 growth figures are revised down as many expect as well as unemployment begins to nudge up to what seems a sustainable degree the Fed might be prompted to bite the bullit. At the moment however the Fed seems to content hawking over inflation. Looking to Europe this does not change much then and indeed the Euro's strength at this point is spurring a lot of talk about exhange rate overshooting around in the corners of blogland. Regarding the actual effects on the real side of the economy as a result of the perky Euro we saw perhaps a first glimmer of what to come with German exports slipping 1.4% in March from February. This of course must be seen in a light of the biggest trade surplus on record since 1990 which is sure to add markedly to German growth rates and intra-European trade and trade with Asia are still thundering along. Looking to France, the recent report on industrial production in March also showed a slight drop in activity albeit it was ever so slight. As such, without accounting for energy production industrial production slipped 0.1% in March from February mainly on the back of car production which slumped 2.4% from February. Turning to monetary and credit developments the tightening campaign clearly seems to have cooled if only a little bit the housing markets in Ireland and Spain. Net demand for housing loans extended its decline in Q1 2007 from Q4 2006 according to a recent report by the ECB. Meanwhile, the ECB target of choice in terms of monetary aggregates the M3 extended three month increase in March with a 10.9% y-o-y increase bringing the Q1 2007 growth average up into double digit category at 10.3 y-o-y.
Finally, I want to dwell a bit at the recent figures on retail sales in whic was published about a week ago by Eurostat. The overall figures of a 2.6% increase on a y-o-y basis and a 0.7% (including food) increase in March from February point to healthy fundamentals but as I always try to stress in terms of the Euro zone we should also home in on the individual countries to get the full story. Consequently, Germany for example saw its retail sales fall in March 0.7% from February and extended a third consecutive y-o-y decline also in March. Meanwhile, retail sales in France and in Spain seems to be holding up very well with healthy increases both m-o-m and y-o-y. Finally we have Italy where there are no figures published for m-o-m in March but I would not expect much and especially not on a y-o-y basis where Italy has seen retail sales drop all through Q4 2006 and what seems to be extended into Q1 2007 as well.
There is little doubt that we should be gearing up for a rate hike from the ECB come June. It will however be more interesting to see how the ECB will fair from June and on. I will be looking for the potential revision of US GDP figures in Q1 and the subsequent likelihood that the bets will mount up against the Dollar in favor of the Euro. On the other hand the ECB is clearly moving ever closer to restrictive territory if it has not already passed that threshold for key economies such as Italy and perhaps also export dependant Germany. In that light and as I believe that the coming economic data from the Euro zone very well could surprise on the downside I do not think the ECB will move beyond 4% in 2007.