A real about turn

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Brazil’s surprise half-point rate cut overnight comes as a surprising about turn from the tightening cycle that has characterised the past five meetings, which took rates up to 12.5%.  Furthermore, CPI is rising and at a 6yr high at 6.9%.  Nevertheless, the way was paved for a move on Monday by the government’s decision to curb spending for the remainder of the year, hinting that this would pave the way for interest rate cuts if needed. 

Emerging markets weathered the credit crisis fairly well and in the subsequent period, whilst G7 output is still 1% below the pre-crisis peak, the BRICs have expanded a further 24%.  Still, it’s a risky move given the current inflation dynamics and Brazil appears to have taken the view that it’s a risk worth taking to given the Brazilian economy some room to cope with a slowdown in the advanced economies.  It’s also in stark contrast to what we are seeing in China, where the authorities remain focused on containing inflation.

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Commentary

German GDP details.  The details of the Q2 GDP data in Germany, which expanded at a mere 0.1%, showed private consumption falling 0.7%, with domestic demand once again help up by equipment investment, which rose 1.7%.  Net trade (exports minus imports) weighed on growth in the second quarter, taking 0.3% off the headline rate. Overall, this is a pretty worrying picture as the equipment investment that supported domestic demand will struggle to continue in the face of prolonged weakness in domestic demand and especially net trade.

Payrolls might provide a little solace. Attempting to anticipate monthly payrolls outcomes is invariably an exercise in futility, but nevertheless some of the partial indicators already available suggest that August may have been a reasonable one in terms of hiring. Today’s ADP Employer Services report showed that private payrolls swelled by 91K in August, after a 109K increase in the previous month. Weekly jobless claims figures taken between the two relevant survey weeks for payrolls imply a similar outcome. With the public sector still laying off workers, the market consensus for payrolls of +75K looks achievable given the evidence thus far. Although such a result might help assuage fears that the US economy is falling back into a black hole, at the same time it could hardly be regarded as good news either. Firstly, such a paltry pace of job creation will not be enough to offset the natural rate of increase in the labour force, and secondly there is a vast army of discouraged workers which continues to suffer because of the scarcity of jobs. America desperately needs proper job creation schemes, because the situation is desperate for all of those unemployed millions.

Swiss franc rallies into month-end. The real roller-coaster during the past month has been the Swiss franc, which has seen the biggest range on EUR/CHF since the start of the single currency. Most of the past week and a half has been dominated by Swissie weakness, partly on fears that the authorities were set to bring in more punitive measures in an attempt to quell the forces pushing the currency ever higher. The latest comments from Swiss economy minister Schneider, coming after Monday’s government meeting, appear to have knocked any residual thoughts along these lines firmly into touch. He admitted that the franc situation was difficult and planned another package of measures in the new-year to offer help to Swiss companies suffering under the strain. This year’s package is due to be discussed later this month, which will spend CHF 870m helping the domestic economy.  The GDP data, released this morning, showed the economy growing 0.4% QoQ, which was in line with expectations, but still slowing from the 0.6% expansion of Q1.

Trichet’s not for turning.  September is the ECB’s best opportunity to present a change of policy-position, but the question is whether Trichet seizes the opportunity to soften the ECB’s stance, or whether this will be left to his replacement in November. Monday’s appearance before the European Parliament suggested that the central bank may choose to interpret price stability risks as broadly balanced, rather than to the upside as was still the case at last month’s press conference. Whilst this morning’s inflation data (HICP) was in line at 2.5%, there are growing signs that eurozone inflation has peaked, having softened from the 2.8% high reached in April of this year. Furthermore, the periphery, which was initially seeing inflation rates increase on the back of sales taxes and other tax changes, is now seeing inflation rates plunging.  The ECB is likely to moderate its view of longer-term inflation risks to being broadly balanced, but that’s as far as Trichet is likely to go. The ECB remains nothing if not obstinate and has been dragged kicking and screaming into changing its views more recently, such as re-opening the bond purchase program. Nevertheless, a more pronounced shift in the policy stance, quite possibly leading to a reversal of some of this year’s rate increases remains a distinct possibility once Trichet leaves at the end of October. The rate increases this year (in July in particular) were ill-conceived and showed that the ECB had learned none of the central banking lessons of the credit crisis, one of which was to be more aware of growing financial risks and not to be overly wedded to an inflation target. Trichet is unlikely to turn, but his successor may see more sense.

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