Week in FX Europe – ECB Bank Tests Stress EUR

• European Bank Stress tests to be published Sunday
• BOE Minutes show dissent and lower for longer interest rate
• German PMI recovers but France still lags

The European Bank Authority will release the results from tests designed to measure the financial strength of 150 of the EU’s biggest banks. There have been reports that as many as 25 banks could fail the stress tests. The main goal of the tests is to reassure global investors that the European financial system is solid and there is no need for concerns. This of course is a lofty objective given the economic turmoil surrounding the Eurozone and in particular given the political quagmire that has prevented the European Central Bank to unleash monetary stimulus.

The BoE’s MPC last met on October 9 and announced there would be no change in the benchmark rate of 0.5% or the size of the bank’s bond-purchase program of £375 billion. The last time the minutes were released, they shed light on the dissent from two members who were in favor of raising rates by 25 basis points, but they were outvoted. The October minutes showed similar dissent.

The two dissenters were Martin Weale and Ian McCafferty. Their main arguments for a rate hike were that the labour market could recover ahead of a current rate hike and that the UK economy was not affected by EU financial contagion.
Economic conditions have not improved, and in fact they have worsened in some parts of the world, so it came as no surprise that the BoE did not change its monetary policy.

The majority of the MPC is concerned with European growth and comments from the BoE’s Chief Economist last week are probably telling of the more downbeat reading of the U.K. economy. Andrew Haldane said he was “gloomier” with the direct implication that rates would remain lower for longer.

European PMIs continue to be mixed. German manufacturing figures beat expectations with a 51.8 factory output preliminary result after a disappointing 49.9 reading last month. The fact that Germany’s flash PMI is above 50 is a sign that the contraction was transitory. In contrast French flash PMI came in lower this month than last. October figures are 47.3 coming in below expectations that the factory output from France would be close to that reported last month of 48.8. It seems that the reduction of the speed of contraction in French manufacturing was also transitory.

The European flash PMI had a net positive gain thanks to the German growth. The PMI rose to 50.7 in October beating expectations that the eurozone would show contraction. The expectations were heavily influenced by the surprise decline in German manufacturing in September.

The results shine a positive light on Europe’s chances of avoiding a recession although a lot of work needs to be done on the political arena to unlock the quagmire that has prevented the European Central Bank from deploying a more direct quantitative stimulus package. The situation is so delicate than even the rumours of corporate bond buying had a deep and lasting effect on the EUR/USD even though the ECB later denied that there was a clear plan on such purchases.

Next week in Europe

This week will kick off on Sunday as the European Central Bank (ECB) will release the results from the Bank Stress Test results. Reports emerged today that as many as 25 banks will fail the tests. Earlier articles singled out 11 banks. The ECB has declined to comment until the actual test results are released.

The biggest event next week will be the US Fed’s Federal Open Market Committee (FOMC) interest rate decision on Wednesday. There are no rate change expectations, but there is a lot of anticipation as this will mark the final bond-buying cycle as the Fed positions itself to raise rates in 2015.

The final USD Gross Domestic Product figure will be reported on Thursday. The expectation is for a drop in the rate from the impressive Q2, but still a strong 3.0%. The trends that emerge after the FOMC will be validated or netted versus the US Economy’s GDP final number in the third quarter.

Later in the week inflation becomes a major trend to watch as the German Consumer Price Index, Japan’s National Consumer Price Index and the Euro-Zone Consumer Price Index Estimate are released in the final two days of the week.