The euro stands its ground

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The euro was one of the best performers during the European session on Thursday, despite the looming election in Portugal, the assumed EU bailout and the prospect of a delay to agreement on reform of the EFSF. There were three over-arching reasons for the single currency’s vigour.  The first was the weakness of both the dollar and more particularly sterling, the latter suffering after soft retail sales numbers for February. Secondly, despite all the noise around the EU sovereign crisis it is still interest rates that are the primary driver of the euro right now so, with PMI data showing a solid eurozone core, the currency is still gunning for an interest-rate increase at next month’s ECB meeting.

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Finally, it’s difficult to negotiate a bailout with an outgoing administration (and indeed, counter-productive), so the perception is that the re-financing required next month for Portugal will be covered by the tripartite arrangement of the Portuguese government, banks and ECB (via purchases and liquidity provision in open market operations).  It’s a sticking plaster, but one which will probably hold.


Commentary

Sterling suffering on lack of post-snow bounce back. Core retail sales in the UK (excluding fuel) fell 1.0% MoM during February, a weaker-than-expected outcome. If you look at the 3-mth average of this series, it’s currently down 0.1%, which does not sound much, but is off the pace seen in the middle of last year and offers more evidence of consumers holding back spending in the face of rising prices – and also of the limited increase in nominal incomes.  There was a seemingly dramatic fall in the YoY rate for core sales in February, from 5.0% to 1.2%, but this was coming on the back of the volatility seen in sales this time last year.

The other notable feature of the data was the sharp rise in the implied deflator, the measure of price increases in the basket of goods to which the retail sales data relates. This jumped to 2.5%, the highest level for nearly two and a half years. All in all, the retail sales outcome does not make the BOE’s job any easier. Pretty much all of the decline in output in Q4 was put down to the bad weather (according to the ONS). However core sales are now a mere 0.1% higher than in December when spending was meant to be held back by the snow. This data suggests that the Q1 bounce-back in the wider economy could be modest at best, with the Q4 decline in GDP reflecting a more structural slowdown in the economy. Sterling was the only major currency to weaken against. the dollar during Thursday’s session, and understandably so.

Germany gets tough on new ESM capital arrangements. Facing critical regional elections this weekend, and amidst domestic criticism that the new ESM again requires too much from Germany, Angela Merkel fought hard yesterday to alter the capital contributions of the fund. Instead of the €40bn of paid-in capital in 2013 as first mooted on Monday, Germany got agreement to get this lowered to just €16bn. Under the new scheme, capital contributions to the ESM will still total €80bn, but paid in equal annual instalments over five years. However, Germany did agree to a provision which accelerates the capital contributions if necessary. Still unresolved is the question of how the existing EFSF will be able to lend the full €440bn which, because of collateral rules, is currently limited to €250bn.

Fed commits to regular quarterly press briefings. In a victory for policy transparency, Fed Chairman Bernanke has decided to hold four press briefings per year. The ECB holds a press conference after each meeting of the Governing Council, while Mervyn King discusses the quarterly Inflation Report in detail.


GDP in Ireland still headed south.
After the 1.6% QoQ decline in Q4 of last year, Irish GDP is now 15% lower than the peak seen in early 2008.  Furthermore, yields have pushed higher this week on the back of fresh concerns regarding the banking sector. The new prime minister remains keen to renegotiate the rate on the bailout loan from the EU although on Thursday stated that he wants to see the “full picture” of Ireland’s banks before discussing a possible lowering of the rate, something the ECB rejected earlier this month due to the government’s refusal to increase its corporation tax rate as part of the deal.

Looking Ahead

Today: FR: Consumer Confidence, March (previous 85); GER: GfK Consumer Confidence, April (expect 5.8, previous 6.0); IFO Business Climate, March (expect 110.5, previous 111.2); US: GDP, Q4 revision (expect 3.0% SAAR, previous 2.8%).

Monday: UK: Lloyds Business Barometer, March (previous 3); US: Personal Spending, February (expect 0.5%, previous 0.2%); Personal Income, February (expect 0.4%, previous 1.0%); Pending Home Sales, February (expect 0.4%, previous -2.8%); Dallas Fed Manufacturing Activity, March (expect 18.5, previous 17.5).

Tuesday: JPN: Jobless Rate, February (expect 4.9%, previous 4.9%); Job-to-Applicant Ratio, February (expect 0.62, previous 0.61); Household Spending, February (expect 0.0%, previous -1.0%); Retail Trade, February (expect -0.5%, previous 0.1%); GER: GfK Consumer Confidence, April (expect 5.8, previous 6.0); FR: Consumer Spending, February (previous -0.5%); IT: Business Confidence, March (expect 102.5, previous 103); UK: GDP, Q4 final (expect -0.6%, previous -0.6%); Net Consumer Credit, February (expect -£0.1bn, previous -£0.3bn); Mortgage Approvals, February (expect 46.8K, previous 45.7K); US: Case-Shiller Composute-20 House Prices, YoY (expect -3.2%, previous -2.4%); Consumer Confidence , March (expect 64.8, previous 70.4).

Wednesday: JPN: Industrial Production, February (expect -0.1%, previous 1.3%); EC: Business Climate Indicator, March (previous 1.45); Eurozone Consumer Confidence, March (previous -10.6); UK: CBI Reported Sales, March (previous 6); US: MBA Mortgage Applications; ADP Employment Change, March (expect 210K, previous 217K).

Thursday: UK: GfK Consumer Confidence, March (expect -29, previous -28); Hometrack House Prices, March (previous -0.2% MoM and -2.7% YoY); Nationwide House Prices, March (expect -0.2%, previous 0.3%); GER: Unemployment Change, March (expect -24K, previous -52K); Unemployment Rate, March (expect 7.2%, previous 7.3%); EC: Eurozone CPI, March (expect 2.3%, previous 2.4%); US: Jobless Claims (previous 382K); Chicago PMI, March (expect 70.0, previous 71.2); Bloomberg Consumer Comfort (previous -48.9).

Source: Bloomberg

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