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Spain's Consumer Prices Fall For First Time In 5 Months
Spain's consumer prices declined for the first time in five months in March, flash estimates from the statistical office INE showed Friday.
Consumer prices dropped 0.2 percent year-on-year in March, after staying flat in the prior month. Prices were forecast to remain unchanged as seen in February.
The harmonized index of consumer prices also fell 0.2 percent annually in March, following a 0.1 percent rise in February.
Month-on-month, consumer prices gained 0.2 percent in February, data showed.
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ECB inactivity pushes euro lower
The euro was whacked lower this week, as expectations grew for the ECB to take action to stave off the threat of deflation at their monetary policy meeting next week. This comes after two successive meetings in which they essentially sat on their hands. Various comments by ECB officials throughout the week have fuelled such investor expectations – for instance, ECB member Weidmann said that quantitative easing couldn’t be ruled out and negative interest rates were still an option, given the impact of the high value of the euro on inflation. Data hasn’t helped either: German PMIs, German IFO Business Climate and Spanish CPI all printed weaker than forecasts last week, and weighed on the single currency.
The threat of action by the ECB will likely continue weighing on the euro in the run-up to Thursday’s announcement. The risk, however, is that Mario Draghi does not act, again, and the ECB continues to take a ‘wait and see’ approach. Therefore, while we expect EUR/USD to come under pressure in the days preceding the announcement, there is potential for a bounce back in EUR/USD later in the week as investors ‘buy the fact’.
Conversely, GBP made good gains. UK CPI for February, released earlier in the week, fell to 1.7% y/y. Heading in to the release, there were growing concerns that the data would print weaker than 1.7% , given the heavy discounting by UK retailers last month. Even though inflation data recorded the lowest reading in 4 years, we witnessed what might be described as a mild ‘relief’ bounce in cable and it pushed back above 1.65. The pair was also better bid following comments from the BoE’s Weale, published in a local newspaper: Weale commented that interest rates won’t stay at 0.5% forever.
Furthermore, UK retail sales data smashed investor expectations on Thursday morning, largely a result of better sales in both food and non-food stores. GBP/USD gapped higher through 1.66 and on to a high of 1.6640, as the data showed that consumers on the high street are feeling more confident about the UK’s recovery. It is data like this that will fuel expectations for a rate hike from the Bank of England come early 2015. If PMIs beat forecasts next week, those rate hike expectations may well be brought forward.
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Spanish CPI shock flags euro deflation risks
The euro slid to a three-week low and government bond yields across the euro zone fell on Friday as a surprise fall in Spanish inflation bolstered investors' bets the European Central Bank will ease policy next week to ward off the threat of a sustained bout of deflation.
Spanish and Italian borrowing costs fell to their lowest in eight years, while stock markets drew support from the renewed potential for looser ECB policy and reports Beijing could fast track infrastructure spending to boost the Chinese economy.
The 0.2 percent annual rate decline in Spanish consumer prices this month was larger than expected and the weakest figure since October 2009.
The Spanish numbers put preliminary German inflation data for March later in the day under even greater scrutiny for signs that the threat of deflation is spreading from peripheral euro zone economies like Spain to the bloc's powerful core.
"This is an ECB expectations-driven story," said Ralf Umlauf, an analyst at Helaba Landesbank Hessen-Thueringen. "The market is definitely positioning for next week's meeting. Market players are expecting some action - any kind of action."
The euro hit a three-week low of $1.3704, falling further back from the $1.40 level many analysts think would be too strong for the fragile euro zone economy in the eyes of ECB policymakers.
At 1125 GMT it had recovered some ground to trade little changed on the day at $1.3735.
Spanish and Italian yields were flat on the day around 3.24 percent and 3.3 percent, after having slipped earlier to eight-year troughs of 3.2 percent and 3.27 percent, respectively.
Portugal's 10-year yield dipped below 4 percent for the first time in over four years.
The ECB sets policy on Thursday next week, when it will have the euro zone-wide flash inflation estimate for March due on Monday. Economists expect that to slip to just 0.6 percent, well below the ECB's target of below but close to 2 percent.
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Germany HICP Inflation Lowest Since Mid-2010
Germany's EU measure of inflation slowed for a second straight month in March to its lowest level in nearly four years, adding pressure on the European Central Bank to cut interest rates in next week's meeting.
The harmonized index of consumer prices (HICP) rose 0.9 percent year-on-year, following 1 percent increase in February, preliminary data from Destatis showed Friday. The figure matched economists' expectations.
The latest HICP inflation figure is the lowest since June 2010, when it was 0.8 percent. The European Central Bank targets inflation 'below, but close to 2 percent'.
Destatis is set to release the final inflation numbers on April 11.
Month-on-month, the HICP moved up 0.3 percent in March, after a 0.5 percent increase in the previous month. Economists had forecast 0.4 percent rise.
The consumer price index (CPI) rose 1 percent annually in March, after a 1.2 percent climb in the previous month. Economists had expected a 1.1 percent increase. The latest inflation rate is the lowest since August 2010.
On a monthly basis, the CPI increased 0.3 percent in March, following a 0.5 percent rise in February. It was less than economists' expectations for a 0.4 percent rise.
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Euro Zone Edges Closer to Deflation
German, Spanish Data Put Pressure on ECB to Consider Fresh Stimulus
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Spanish consumer prices unexpectedly fell from a year ago and German inflation edged below 1%, suggesting the euro zone is edging closer to a paralyzing bout of extremely low inflation, or even broad-based price declines known as deflation.
The inflation figures from two of the bloc's four-largest economies put further pressure on European Central Bank officials to consider fresh stimulus measures when they meet Thursday, including negative rates on bank deposits. Annual inflation in the euro zone was 0.7% in February, and the reports from Germany and Spain suggest it could weaken to as low as 0.5% when data for the entire bloc are released Monday. The ECB targets inflation of just below 2%.
Spanish consumer prices in March were 0.2% below levels seen a year ago, as prices for food and nonalcoholic beverages declined. This followed a 0.1% increase in prices in the previous month.
Annual inflation in Germany was 0.9%, while consumer prices were up 0.3% on the month.
"The net effect has been to boost expectations for ECB action next week," said Marc Chandler, currency strategist at Brown Brothers Harriman, in a research note. The euro fell against the U.S. dollar as hopes for ECB interest-rate cuts rose.
Weak consumer prices appear to be filtering through to household and business expectations for future inflation trends. According to a monthly report from the European Commission, businesses reported a drop in their expected selling prices and consumers expected prices to rise less rapidly over the coming 12 months.
ECB officials have cited stable anchored inflation expectations as a factor in keeping their monetary policies unchanged. If these expectations start to wobble, the case for additional easing steps would grow.
Friday's consumer price reports further test the ECB's resolve in combating extremely low inflation. When prices grow too slowly, households, businesses and governments have a harder time servicing their debts, while consumers may put off spending. These pressures intensify when prices fall outright, as has been the case in Japan for the past two decades.
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Eurozone consumers bullish despite Crimea crisis
Eurozone consumers and businesses have shrugged off the Crimea crisis and are at their most confident for two and a half years, a survey from the European Commission showed on Friday. The Commission's index of consumer and business sentiment for March rose for the 11th month in a row, hitting a 30-month high of 102.4 points.
Sentiment rose strongly in the countries on the edge of the eurozone where the debt crisis hit hardest. The index was up 2.2 points in Spain and 1.3 points in Italy.
But confidence also rose in the core economies of France (up 0.7 points) and Germany (0.4 points).
Martin Van Vliet, an analyst at ING bank, estimated that this confidence would translate into a growth rate of 0.4 percent in the first three months of this year -- compared to 0.3 percent in the fourth quarter of 2013.
"The Crimea crisis and slowdown in some emerging market economies has failed to dampen the economic mood in the eurozone," van Vliet said in a research note.
However, another eurozone watcher, Howard Archer from IHS Global Insight, cautioned that the recovery would still be held back by stubbornly high unemployment in the 18-nation bloc, as well as slow wage growth.
"Any improvement in eurozone consumer spending still seems more likely to gradual rather than pronounced over the coming months as there are still significant constraints in most countries," he said.
At Capital economics in London, Ben May said that the latest data was another sign that the eurozone recovery had "built up a little momentum in the early months of the year".
And at Berenberg bank, Robert Wood said the eurozone was "seemingly unflappable" as growth headed towards, and maybe above, the trend level "despite emerging market wobbles and the situation in Crimea."
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EUR/USD Forecast March 31, 2014
The EUR/USD pair initially fell during the session on Friday, but bounced enough to form a hammer. This hammer suggests that we are going to continue to grind away in this general vicinity, and as a result we are a bit cautious about selling. We think that the market is relatively negative overall, but do see that a break above the top of this hammer probably since this market looking for the 1.39 level in the meantime. Short-term buying opportunity seems to be in this market’s future at this point in time, but a break of the bottom of the hammer would be a very negative sign.
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EUR/USD Forecast Mar 31- Apr 4
EUR/USD was pressured lower once again, as ECB members released dovish comments. And now, it is money time, with the ECB decision preceded by the all important inflation numbers. Is the ECB ready to act? Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.
Various members of the European Central Bank expressed more dovish comments than usual. Standing out were Jozef Makuch who said that there is “growing readiness to act” regarding deflation and Jens Weidmann of the Bundesbank, who did not rule out QE. In addition, the euro was hurt by weaker German business confidence and PMIs. In the US, data was somewhat better than expected, with a nice drop in jobless claims and strong consumer confidence covering for weaker new home sales. What’s next for the pair?
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EUR/USD Rebounds as Investors Square Positions Ahead of Next Week’s CPI Data
The EUR/USD traded higher on Friday as investors squared positions ahead of the week-end. Next week, data on Euro Zone inflation will be released. This could set the tone for the week because it will likely influence the European Central Bank’s decision on whether to apply more stimulus to the economy. The lower price action this week suggests speculators may be betting the ECB will ease monetary policy further with action such as negative deposit rates.
Earlier in the session, it was reported that German consumer-price inflation slowed less than some traders anticipated, In addition, inflation slowed in three German states and price unexpectedly pushed Spain into recession.
The GBP/USD rallied on Friday after British consumer confidence in March surged to its highest level since August 2007. Despite efforts from the Bank of England to talk the currency lower, it looks as if speculators have returned, increasing bets for an earlier than expected interest rate hike.
Technically, the main trend is down on the daily chart. The main range is 1.6785 to 1.6465 so the current rally into 1.6625 to 1.6663 merely represents a 50% to 61.8% retracement of the last break from the top.
June Comex Gold has reached a critical area on the daily chart. The range for the year is $1186.70 to $1392.20. The 50% level for the year is $1289.45. This level held as support yesterday. A break though this level could trigger a steep drop to the next support level at $1265.20.
Fundamentally, the firmer stock market, the recovery in the U.S. Dollar, talk of higher U.S. interest rates and the easing of tensions between Ukraine and Russia are all reasons for the recent speculative liquidation.
Bullish Brent crude oil movement helped draw May Crude Oil futures higher on Friday. The spread between the two oil contracts increased on stronger U.S. economic data and concern that possible Western sanctions on Russia’s energy sector could disrupt global supplies.
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Spain, The ECB And The Power Of Talk
Spain is in a mess. Over a quarter of its adult workforce is unemployed, and according to CIB Natixis it has lost 25% of its production, even more than Greece. Spain’s inflation rate has been falling steadily and has now turned negative: the most recent retail sales figures show a fall of 0.2%. Various people anticipate ECB easing monetary policy because of the growing threat of deflation in Spain.
But this is to misunderstand the role of monetary policy in a currency union. The ECB sets monetary policy for the union as a single unit, not for its individual components. Deflation in Spain is a driver of ECB decisions only to the extent that it depresses Euro zone CPI. And I’m sorry if this sounds brutal, but Spanish unemployment is of no consequence, since the ECB does not have a mandate to target unemployment even at the Euro zone level, let alone in an individual country. The ECB can no more set policy to tackle deflation or unemployment in Spain than it can set policy to meet the desire of German savers for better returns. Its mandate is to maintain inflation close to 2% across the Euro zone economy AS A WHOLE.
Admittedly, Euro zone aggregates don’t look particularly healthy: inflation at 0.8% is far below the 2% target and M3 is stagnating. M3 lending is actually falling, indicating that bank deleveraging continues to place severe restrictions on the availability of finance, especially in periphery countries:
Real interest rates in the periphery remain far above the ECB’s policy rate.
But there is some good news, too. Euro zone stocks have risen substantially in the last week, and yields on periphery bonds are at their lowest for several years. And the Euro has fallen, which benefits exporters. To be sure, the Euro zone already has a trade surplus, largely due to the ever-growing German trade surplus. But exports need to strengthen in periphery countries too, so a falling Euro is perhaps good news for them (although I have argued elsewhere that it is more likely to benefit German exporters).
These market movements do not seem to be driven by fundamentals. Rather, they appear to be driven by expectations that the ECB will undertake more aggressive monetary easing, perhaps by means of QE or negative interest rates on bank reserves. The ECB has signaled that it is considering both of these.
But I fear these expectations are wrong. Signals don’t necessarily equate to action, and if markets respond to the signal by pricing in the action, then they may render the action itself unnecessary. If the ECB’s intention was to force a fall in the Euro, then the combination of signalling with the deplorable Spanish retail figures just released has already done the job. In which case there will be no easing.
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