Latest news on European Mid Morning Update 8th May 2008
| Is Europe beginning to show signs of strain? Releases from Europe: No great surprises from the first European data releases. The more important German industrial production number later has more potential to impact on the Euro and probably more so than the two rate decisions due later in the morning. Meanwhile the White House economist is looking for a H2 recovery in the economy stating “The data are pretty clear that we are not in recession. I would be very surprised if the NBER, looking back at this period, would date this as a recession.” He expects Q2 to be pretty flat and that retail sales and manufacturing are the only areas of the economy showing the type of deterioration that NBER would consider recession range. He also observed that job declines are, so far, well below those of the 2001 recession. Therefore the earlier-than-expected release of some government tax rebates could act as a stimulus to the economy, he offered. However, he did voice concern over the exorbitant rise in oil prices which is putting downward pressure on growth. He estimated that every additional on oil reduced growth by 0.25% annually.
March April May The Bank of England and European Central Bank are due to announce their rate decisions
To highlight just how significant the decline in the Euro is, it has been the largest percentage drop ever since the 1.1640 low in November 2005. During that time the Dollar lost 37.6% of its value. And it does seem to be on course for a move to 1.5154 at least, possibly just below 1.51 which would imply a drop of around 5.7%. Given the market’s preoccupation for hating the Dollar this is a remarkable turn around but more than that it should be sustainable for at least 6 more months. You may recall that around February last year the market took exception to a talk by Bernanke in which he accepted lower growth and higher inflation. The Dollar was sold off on the back of this. The European economy appears to have about an 8-10 month lag to the U.S. economy and right now we are seeing Europe beginning to return lower growth and higher inflation while there are tentative signs of a stalling in the U.S. downturn. The difference between 8-10 months ago and now is that oil has very nearly doubled in price and inflation is even higher. Consumer sentiment is also much, much weaker and credit comes with tighter rules. At the moment the decline in Europe has not been excessive but with lower growth and consumer confidence the risk is for any weakness in the economy to be thoroughly tested. It may be through LBO’s unable to meet debt obligations as business dries up or it may be through weaker consumer spending as they allocate more of their budget to energy costs and rising food prices. However, while a bounce in the Euro is expected after the current decline the next move lower could be stronger…
USDJPY EURUSD USDCHF GBPUSD Spt: 103.30-60 1.5258-70 1.0500-25 1.9441-70 See Also
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