An Interesting Week Ahead
I am staying a bit in Eurozone Watch mode this Monday morning as I look forward to the coming week. In this way and on the back of my most recent analysis on last Thurday's ECB meeting I am coming in with a small preview of a rather important data point this week. Regarding the ECB, the big 'news' was that Trichet changed the tone ever so slightly towards a more balanced approach between growth and inflation in favor of the former. Not everybody is convinced that the ECB will lower rates as soon as the next session (March) which I have had the audacity to suggest recently. Macro Man for once does not seem to be too convinced ...
Frankly, reading through the comments, Macro Man really can't see what is so uber-dovish in Trichet's remarks.
Perhaps next month's staff forecast revisions will give the ECB an opportunity to exchange their hawks' talons for the gentle cooing of doves. But from the sound of it, M. Trichet still sounds several months away from beginning to seriously contemplate trimming rates. Unsurprisingly, that's pretty much what's embedded in cash markets at the moment. Three month Euribor fixed at 4.35% today, which is much lower than December's panic highs but still represents an unusually large basis for a central bank firmly on hold.
I would be a fool not to take MM's views into account since he is normally very much on the mark but I still have a feeling that he might be too careful on this one. As for the future rate implied by the Euribor I second the main point made my MM but also emphasise that this gauge can come down quite fast once the potential news solidy towards a cut. In terms of news I have said before that Q4 GDP figures will be an important indicator as these will point towards the speed with which the slowdown is coming in. And wouldn't you know it; this week will see the release of the provisional estimates for the Eurozone as well as German GDP figures on Thursday the 14th of February. Whatever the result it is almost certainly going to dissapoint on the downside not least because of the upward revision of the Q3 figures which suggests a rather sharp backdrop in Q4. In case you don't remember the Q3 figures I reproduce below the graphs from my notes on the release ... (note that the charts show the figures before they were revised upwards and thus the main Eurozone aggregate as well as the German figure should be nudged upwards 0.1%)
As always, I want to emphasise the caveats of looking at the Eurozone as one single economy and in this light I will be looking forward with some weariness to the provisional estimate for Italian GDP. Also the slowdown in Spain and more specifically its pace will be important for forecasting purposes I think. As for the Q4 figures' bearing on the ECB and the Euro I am not sure what to expect. Trichet already somewhat punctured the Euro with his slight change in discourse last week and as such markets may not be moved as much as could have been expected. I think that the ECB, some way or the other, chose to shift its stance just a bit in anticipation of a pretty dim reading and thus in order to be at the forefront of events. In any case, be sure to keep your eyes open come Thursday. More generally, GDP figures are of course only good as far as goes a very crude picture but this nonetheless what we have to play with.