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Trichet self-assured on the course of action

The ECB is following a familiar pattern here. At the start of the credit crisis in August 2007, whilst quick to offer liquidity to the banking system, the ECB was slow to acknowledge that, economically, this was not a big issue for Europe. Indeed, after the Fed had cut rates by 3.25% between September 2007 and June 2008, the ECB’s response was a rate rise in July 2008. This occurred at time when the Fed was still incredibly cautious about the fragility of the financial system.  As well as a more fragile global economy, the eurozone is now facing its own specific risks, most clearly in relation to sovereign debt sustainability and also banking sector fragility (which owing to bond holdings are very much inter-linked). Right now, the ECB appears to be making a series of bets on the temporary nature of the current soft patch, the ability of peripheral (and in particular, Greece) issues to be contained and on the likelihood of inflationary forces to continue against the backdrop of sustained fiscal austerity, which have historically proven dis-inflationary, notwithstanding any temporary commodity price volatility.  Trichet may be clear about what the ECB is doing, but there is less clarity that this is the right thing to do.

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Yen main gainer overnight whilst Korea raises rates. Compared to the New York close, the yen was the only currency of the majors standing firmer vs. the dollar as we come into the European session.  Korea raised rates for the third time this year, taking its benchmark rate to 3.25%.  The move is designed to cool credit growth and bring inflation back into line, currently running at 4.1%.  The KRW was slightly softer on the largely anticipated move, nudging up above 1083 vs. the USD.  Meanwhile, China’s trade data was not as punchy as expected, the surplus coming in at USD 13.1bln in May, from USD 11.4bln.  Expectations were for a surplus around the USD 19bln mark.

Aussie suffering from synchronicity. This is turning into a week the Aussie would rather forget, with the currency down 1.3% vs. the USD so far at a time when most of the other majors (Swiss franc aside) are firmer, the Kiwi notably so. The initial impetus was the latest jobs data, which showed only a partial reversal of last month’s fall in employment. Nevertheless, in the wider picture, recent data and also this week’s RBA statement reflect the fact that the current slowdown is far more synchronised globally than we’ve seen previously. This time last year, whilst the US data was slowing dramatically and kicking Fed tightening-expectations firmly into touch, Australia was still powering ahead, 1.4% QoQ growth in Q2-10 more than three times faster than US growth during the same quarter.  There’s a sense this time around that the slowdown is more synchronised, with softer data not only in the US, but in Europe and Asia as well. Throw in the hit to risk appetite and the perceived reluctance of the Fed to save the day with QE3 and the Aussie looks set for a more sober period during which it will find it far harder to stand out from the crowd than has been the case over recent months. This is already apparent with AUD having moved from top performer of the majors between October 2010 and March 2011, to worst performer since the start of May.

Greek growth disappearing fast. What growth there was in the first quarter mostly disappeared as statisticians ‘revised’ the numbers this morning, turning 0.8% QoQ to a mere 0.2% QoQ. In the world of Greek statistics, zero comfortably falls within the normal margin of error for this outcome, which comes after nine previous quarter of negative growth. Furthermore, the figures are hardly worth getting excited about, given that what growth there was came from the collapse in imports improving the net trade position of the Greek economy. Final consumption expenditure is still falling some 7% in YoY terms, with investment down over 20% on the same basis. As mentioned yesterday, whilst the level of fiscal tightening that Greece is planning for the next three years is not unprecedented when looking at recent international history, undertaking it at a time when the economy is so weak is unique. The bottom line is that, despite being in positive territory (just), these figures don’t offer any hope for the Greek authorities going forward.

OPEC’s power struggle is bad news for the global recovery.  For the first time in 20 years, OPEC failed to agree a unified position on production quotas at their regularly scheduled meeting, which led Saudi Arabia’s Oil Minister to remark that ‘it was one of the worst meetings we’ve ever had’. Indeed, he described the arguments of the group favouring unchanged quotes as ‘an obstinate position’. The Saudis were joined by Kuwait, Qatar and the UAE in calling for group production to be raised by 1.5bpd to 30.3bpd. However, they were blocked by other heavyweights such as Iran and Venezuela which feared a collapse in prices if quotas were lifted.

In response, Brent crude jumped $2 a barrel to $118, a rise of more than $4 in the last two trading sessions. Since late February, the oil price has traded in a $107-127 band, so the current price is roughly in the middle of that range. Recently there has certainly been growing evidence that demand coming out of the developed world has been slowing (if not actually declining in some countries), reflecting the extremely high prices. However, demand coming out of the developing world remains quite robust. The dispute within OPEC could also be a function of increasing political tension between the major producers, with Iran (the second largest producer in the group) much more prepared to throw their weight around.

OPEC disunity at this time is highly unfortunate given the recent suggestion that the global recovery is slowing, in part because of the high price of energy. With OPEC in general and Saudi Arabia in particular apparently unable to cap the oil price, OPEC’s internal friction is bad news for both growth and inflation, especially in the major advanced economies.


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