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The US fares poorly, the EMU fares decently and the UK is between

Fri, Mar 7 2008, 09:56 GMT
by Przemysław Kwiecień

X-Trade Brokers, XTB

This week’s macroeconomic releases and central banks’ decisions paint a clearer picture of what is going on with economies in the developed world. The US still faces major problems as activity is clearly lacklustre. Although the ISM services rebounded from January’s dramatic reading, both indices (ISM manufacturing and services) are below the 50 points line, signalling contraction. Remarks from the Beige Book and the ADP employment report add to that gloom increasing a probability that the GDP in the first quarter may actually shrink for the first time since the third quarter of 2001. Therefore expectations for future rate cuts are ballooning with the market being already certain of a 75 bp cut in March.

The euro zone on the contrary is doing better. At first, the German Ifo surprised with the second consecutive rise. Then the PMI activity indices also pointed to some acceleration. With unemployment rates low and rising PPI inflation this leaves little or no room for the ECB to cut rates and Trichet’s hawkish comments are just a confirmation of that.

In the UK the picture is mixed. The GDP in the second half of 2007 had risen faster than in the EMU but it was only because of mounting inventories. A stagnation in house prices and falling housing starts numbers draw some analogies to the situation in the US. Yet while the scale of the downturn is far from certain, the BoE seems to be worried about a high inflationary pressure. It seems that some cuts are still there in a pipeline, yet a degree of monetary easing is to be decided.

This picture has some clear consequences for the currency markets. The EURUSD scores consecutive records and it seems that rates differential still offers some scope for further appreciation of the euro. Similarly, tough stance of the BoE supports the sterling, helping it to recover some of previous loses. These prospects are not strong enough, however, to help the European stock markets if the situation in the US doesn’t change for the better.

Published on  Fri, Mar 7 2008, 09:56 GMT

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X-Trade Brokers Dom Maklerski SA  | Robert.kosowski@xtb.pl; 00-876 Warszawa
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