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Draghi Sees No ‘Immediate’ Need for More Rate Cuts, Spiegel Says
European Central Bank President Mario Draghi sees no need for further cuts to the institution’s benchmark rate amid “encouraging signs” that the euro crisis may be resolved, Der Spiegel reported, citing an interview.
“At the moment we see no immediate need to act” on the main refinancing rate, the magazine cited Draghi as saying. “The crisis isn’t over, but there are many encouraging signs.”
The ECB last month slashed its key rate by a quarter point to a record low of 0.25 percent as the Frankfurt-based central bank warned that the euro area may face a “prolonged period” of low inflation. In the interview published today, Draghi said that there are no signs of deflation, adding that “we don’t have a situation as in Japan.”
Positive signs for the currency bloc include an economic recovery in several countries, diminishing imbalances in European trade and decreasing budget deficits, Spiegel cited Draghi as saying. The improvements exceeded the ECB’s projections from a year ago, according to the magazine.
The euro area’s recovery almost came to a halt in the third quarter, with growth slowing to 0.1 percent as France’s economy unexpectedly shrank and Italy extended its longest postwar recession. The latest data are more encouraging, with output from euro-area factories and consumer sentiment both rising more than economists forecast in December.
Jens Weidmann, president of Germany’s Bundesbank, told the newspaper Bild that the current “calm” on financial markets may be deceiving. “Subdued price pressure shouldn’t be a license for arbitrary monetary-policy easing,” Weidmann was cited as saying.
The ECB is weighing other tools beside the main refinancing rate to rekindle growth. Offering more long-term loans to banks would only make sense when those lenders are in a position to extend credit to companies and households, ECB Executive Board member Benoit Coeure said Dec. 9.
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EUR/USD Forecast Dec 30-Jan 3
EUR/USD enjoyed the low liquidity to shoot higher, but this was short lived. Retail and manufacturing PMI’s, Spanish Unemployment Change and M3 Money Supply are the main market movers this week. Here is an outlook on the major events at the year’s end and the beginning of 2014 and an updated technical analysis for EUR/USD.
Last week, French Consumer Spending edged up 1.4% in November, beating predictions for a 0.3% rise the first gain in : The markets are not used to seeing strong numbers out of France, so Tuesday’s data was unexpected good news. Also the US experienced positive data, before and after Christmas, seemingly justifying the decision of the Fed to taper before Christmas. Can the turn of the year bring more excitement? Let’s start,
Updates:
* All times are GMT
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Euro Zone Rode the Shock Waves in 2013
For the euro zone, the real story of 2013 has been what didn't happen rather than what did. Confronted by a series of shocks that in previous years might have reignited concerns over the survival of the currency bloc, the euro has proved remarkably resilient.
The decision to force uninsured depositors in the two biggest banks in Cyprus to take losses didn't lead to bank runs across the periphery as many had feared. Unemployment remained painfully high in much of Southern Europe, yet there was little evidence of the social unrest that the doomsayers had predicted. There were political crises in Italy, Greece and Portugal. But on each occasion, the outcome was a stable government committed to reforms designed to make the economy more productive and competitive.
Instead, as fear of an implosion receded, the economy recovered. The gross domestic product of the euro area is likely to have expanded by 0.5% in the second half of 2013; Portugal came out of recession in the second quarter, Spain in the third quarter; Italy stopped contracting in the fourth quarter and Greece is expected to return to growth in 2014 for the first time in seven years; Ireland defied most forecasts by growing 1.5% in the third quarter alone.
Spain, Portugal and Greece eliminated vast current-account deficits, reducing their reliance on foreign borrowing—and not just by slashing imports; Iberian exports in particular have surged, aided by structural reforms that have boosted competitiveness. Budget deficits have been cut: Greece's 19% fiscal adjustment is a remarkable achievement that should allow the country to deliver a primary surplus before interest costs in 2013.
Against this more benign economic backdrop, bond yields have fallen back to 2010 levels as foreign investors have returned to crisis-country debt markets. Ireland was able to exit its bailout program and Portugal hopes to do so next year. The European Central Bank's balance sheet, which ballooned during the crisis as funding markets closed, has shrunk as banks have been able to repay emergency loans; financial fragmentation across the euro zone has eased as borrowing costs in the periphery have finally started to come down.
All this progress has been enough to persuade some brave souls to call the end of the euro crisis. "All relevant economic and financial indicators indeed suggest the systemic crisis is over," declared Holger Schmieding, chief economist of Berenberg Bank in a research note last week.
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Euro set to be 2013's top-performing major currency
The euro eased back on Tuesday but was still on track to be the world's best-performing major currency this year, while the dollar was set for its biggest annual gain against the yen since 1979.
The single currency has gained 26 percent against the yen this year. It dipped 0.2 percent to 144.78 yen on Tuesday, having set a five-year high of 145.67 yen on Friday.
Against the dollar the euro has gained more than 4 percent this year, baffling many hedge funds who had expected a weak euro zone economy and a reduction in Federal Reserve bond-buying to strengthen the greenback this year.
The euro was 0.2 percent down at $1.3770, as the gap between U.S. two-year government bond yields and German yields widened, increasing the relative attractiveness of the dollar.
The euro has been boosted recently by banks in the region repatriating funds to shore up their capital bases before an asset quality review by the European Central Bank, and as banks repay cheap crisis loans to the ECB, tightening liquidity.
Comments at the weekend form ECB President Mario Draghi that he saw no urgent need to cut the euro zone's main interest rate further and saw no signs of deflation also helped the euro.
The dollar slipped 0.1 percent to 105.09 yen, but was up 21 percent for 2013, its biggest annual gain since a 23.7 percent rise in 1979, according to Thomson Reuters data.
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Germany's Massive Trade Imbalance Is A Sign Of Trouble To Come
Over the past few decades there has been a great deal of focus on the large trade imbalance between the US and Asia - first with Japan and more recently with China. While that is still an issue, we may be facing a new imbalance that is starting to grab the attention of politicians, economists, and the markets.
The chart to the right shows the current account balance as a percentage of each nation's GDP. And one nation clearly stands out - Germany.
According to Merrill Lynch the massive German current account surplus will manifest itself in two major ways:
1. It is bound to generate friction within the Eurozone, particularly as German assets appreciate, while the periphery is experiencing deflationary pressures.
Merrill: - Germany’s surplus holds a deeper meaning for financial markets in 2014. First, it signifies the difficulty faced by ECB monetary policy. It should not be easy to achieve a balance between Germany with its growing current account surplus and where real-estate prices have started turning up [see Twitter chart from the ECB], and the periphery countries that are facing disinflation despite having somewhat reduced their current account deficits as a tradeoff for low growth. Whether it happens in 2014 or not, eurozone fiscal policy discussions will be necessary at some point, though politically difficult. Eurozone financial issues could still destabilize global financial markets at some point in the future.
2. This imbalance is likely to have an impact on the currency markets, especially with respect to the yen.
Merrill: - The second implication is for the exchange rate issue with Japan. While Germany’s current account surplus has expanded, it is Japan’s current account that has deteriorated sharply. Comparing Japan’s balance of trade in 2010 and 2013 (Jan- Nov for both years), reveals that it has fallen by ¥16.1tn (3.2% of GDP). Around half (¥7.5tn) of this is in non-energy trade. Of that ¥7.5tn, more than ¥2tn is due to trade with the EU, and the rest is versus Asia. Japan is expected to post a ¥11-12tn (1.2- 1.4% of GDP) trade deficit for 2013. Although its income balance will keep the current account positive, the surplus will likely be less than 1% of GDP.
...the change in current account imbalances seems consistent with our FX strategy team’s projection that the leeway for a rebound in the JPY is relatively limited versus the EUR, and the JPY should continue to weaken versus USD in 2014.
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European labour market opens for Romanians, Bulgarians
Romanians and Bulgarians will have the right to work in any of the European Union's 28 countries from Wednesday, sparking fears of mass invasion and benefits tourism in Britain and Germany.
Britain rushed through a series of measures to ban EU migrants from claiming unemployment handouts from the moment they arrive, while German lawmakers raised concerns about social benefits fraud.
But Bucharest and Sofia slapped down the fears, saying their countrymen are not planning an exodus en masse.
In Sofia, President Rosen Plevneliev asserted in his New Year's Eve speech that Bulgarians "would like to have a worthy job" at home, and "not to buy a one-way ticket and leave Bulgaria".
Bulgarian and Romania joined the European Union in 2007, becoming the bloc's poorest members.
Wary of large numbers of jobseekers arriving from the two countries, several EU countries kept their job markets closed to citizens from the two countries for several years following the accession.
Seventeen EU countries including Italy and Sweden have since lifted the restrictions.
Analysts believe therefore that Bulgarians and Romanians who are looking to work elsewhere would already have done so, rather than wait until Wednesday, when the nine remaining EU countries -- Austria, Belgium, Britain, France, Germany, Luxembourg, Malta, the Netherlands and Spain -- lift restrictions.
Nevertheless, the move was watched with trepidation in Britain, where hundreds of thousands of immigrations have made their home since the EU expanded to eastern Europe in 2004.
The Labour government in power at the time vastly underestimated the number who would come and admitted it should have done more to limit the influx.
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Spain exits eurozone bank support programme
The eurozone aid programme for struggling Spanish banks closed as scheduled on Tuesday after providing some 41 billion euros ($55 billion) to get them through the debt crisis, a statement said.
The support "has proven instrumental in recapitalising and restructuring Spain's troubled banks, which are today on a sound footing," said Klaus Regling, head of the European Stability Mechanism, the fund set up to help eurozone countries at the height of the crisis.
"Spain's programme exit after one year is an impressive success story," Regling said in an ESM statement.
"Despite the challenges ahead I am confident that the ESM's support, combined with structural reforms, will allow the Spanish economy to achieve stability and substantial growth," he added.
In early 2012, it looked almost certain that Spain, crippled by banks over-exposed to a collapsed property market, would need a full international bailout as was the case for Greece, Ireland and Portugal earlier.
Madrid, however, refused to go down that path and instead managed to negotiate a deal with its eurozone partners worth up to 100 billion euros ($137 billion) in direct aid to fix the banks.
The ESM in the event needed only to pay out 41.3 billion euros as the Spanish economy, the fourth largest in the eurozone, stabilised despite massive problems and soaring unemployment.
"Spain will not request any follow-up assistance from the ESM," the statement said.
Ireland has just exited its bailout programme, without seeking any credit-line safety net.
The Spanish "government's determined reform efforts and the people's readiness to accept temporary hardship for the sake of a sustainable recovery are exemplary," Regling said.
"The Spanish success shows that our strategy of providing temporary loans against strong conditionality is working."
If their situation has improved, Spain's banks remain under great pressure, with figures earlier this month showing bad loan levels running at their highest in 50 years.
Spain crawled out of recession in the third quarter but economists warn of threats to its recovery, chief among them a staggering unemployment rate of around 26 percent.
source
France's Hollande Reiterates Unemployment Pledge
French President Francois Hollande has reiterated his pledge to reduce unemployment and announced new measures to achieve the same.
In his televised New Year's address on Tuesday, Hollande put an offer to companies that will allow lower labor charges for hiring more staff.
"It is based on a simple principle: lower labor costs and fewer restrictions on business activity in return for more recruitment and greater dialogue with trade unions", Hollande said.
He had vowed to bring down unemployment by the end of 2013. However, recent figures from the labor ministry revealed that jobless claims rose 0.5 percent in November to 3.292 million, following a surprise fall in the previous month.
Citing data over several months, the ministry said the rising trend in unemployment has started to reverse in the fourth quarter. Meanwhile, Hollande's popularity ratings have plummeted to the worst levels for any French president.
In its latest forecast this month, statistical office INSEE said unemployment is likely to remain stable through to mid-2014. The agency has forecast the jobless rate to be around 11 percent through to mid-2014.
source
German 2013 Employment At Record High
German employment reached another record high in 2013, but the rise in employment was only about half of the average of 2011 and 2012, a report published by Destatis said Thursday.
An average of 41.78 million persons were employed in 2013, up 232,000 or 0.6 percent from the previous year. Employment hit a record for the seventh month in a row.
According to provisional estimates based on the labor force survey, the number of unemployed people decreased slightly by an average of 36,000 to just under 2.3 million in 2013 compared with the previous year.
The jobless rate fell to 5.2 percent in 2013, which was lower than in almost all other EMU member countries.
In the service branches, the number of persons in employment increased by a total of 227,000 or 0.7 percent in 2013.
The producing branches, too, recorded employment gains in 2013, which were, however, less pronounced than in the previous year. Employment rose by 17,000 in industry, and by 20,000 in construction.
Meanwhile, in agriculture, forestry and fishing, the average number of persons in employment dropped by 31,000.
source
This Manufacturing Report From France Is Just Plain Ugly
There's a widespread belief that the French economy is fundamentally flawed due to some combination of taxes and regulations. The news today advances the argument that something has seriously gone wrong.
Today is PMI day, and we've been getting manufacturing reports from around the world. Mostly they've been okay.
The Spanish and Italian manufacturing numbers were quite solid actually. And the German manufacturing numbers were awesome.
But according to Markit, the French manufacturing sector has hit a 7-month low, dropping from 48.4 in November to 47.0 in December. Scores below 50 indicates contraction.
You can just see on the chart how sickly the sector is.
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