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Market Sense

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Surprised? Me?

Fri, Aug 8 2008, 08:16 GMT
by Yapi Kredi Bank Economic Research Department

Yapi Kredi Bank

Trichet’s press conference today confirmed that the window of opportunity for further rate hikes has been slammed shut by the cold blast of negative data releases that swept through the eurozone in the last few weeks. Rate hikes have been priced out, and the real question is how long the ECB can lean against the wind before the market starts pricing in rate cuts—my guess is another 2-3 months at the maximum. While the ECB has “no bias”, the macro data have a clear downward bias that leaves little doubt on the direction of the next policy move. Today’s press conference also confirms that the golden age of the euro has probably come to an end, and that conditions are in place for a recovery of the USD over the remainder of the year. In this regard, Bernanke’s and Trichet’s positions this week were reassuringly consistent (unlike in June), and this should also favor a consolidation of the recent commodity price correction.

The ECB today acknowledged that the weakening of growth evident in the latest data is only partly a technical correction from an unusually strong Q1, and that some of the long-noted downside risks to growth have started to materialize. In particular, in both the statement and the Q&A, Trichet pointed to a weakening in the global economy and to the adverse impact of high commodity prices. The statement notes that growth in “mid-2008” will be “substantially weaker” than in Q1, and the sum up paragraph dropped the reference to “moderate ongoing real GDP growth”, which would sound inaccurate for an economy which seems to have hit a wall in Q2. In September, the revised staff forecasts will likely show a significantly less rosy outlook. We have been arguing for a long time that the eurozone would face a steeper downturn than the ECB seemed to anticipate, and the recent data have brought strong support to our position: our proprietary indicators, the composite PMI and the GDP tracker, are pointing to a very significant loss of momentum. Q2 is very likely to be in negative territory, raising an outside risk of a technical recession.

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Published on  Fri, Aug 8 2008, 08:18 GMT