There are two forces working on the markets right now: 1, central banks in simulative mode and 2, fragile recoveries and tail risk from Europe. Both have been out in force today. Earlier Eurozone economic data for Q4 2011 actually surprised to the upside, GDP contracted by 0.3%, better than the 0.4% fall that was forecast.
France’s economy managed to stay above water in the last three months of 2011, while Germany didn’t contract as much as expected, although Italy slipped into a technical recession after its economy contracted 0.7% in Q4 after falling 0.2% in Q3. The market took the GDP data in its stride, after all everyone in the market expected weakness at the end of 2011 and now people want to know how quick the recovery will be in 2012. What was far more interesting were reports that French car maker Peugeot had apparently approached the ECB about EUR 1bn of loans that are backed by collateral. So has the ECB has replaced the entire banking system in Europe, or what?
We don’t know if this plan by Peugeot would be accepted, but it leads one to question the integrity of the ECB’s balance sheet in the wake of the LTRO programme. It also suggests that some corporates would consider cutting out the middle man (the banks) and going straight to the source of the funding - the ECB. This is another way of admitting that Europe’s banking sector is up the creek without a paddle, and the even though risk may be rallying post the ECB liquidity injection, banks in Europe are still in a critical state.
On the topic of central banks and liquidity the Bank of England presented its first Inflation Report of the year. The report came after some fairly depressing labour market data. Although the unemployment rate remained steady at 8.4% (the lowest level since 1995) the claimant count rate rose more than expected in January by 6.9k, vs. 3k expected. There are now 2.67 million people unemployed in the UK, which is an increase of 48,000 over the last 3 months. Added to that wage growth remains below the rate of inflation at 2% per year, which suggests that inflation will have to fall further to stimulate consumption.
The Inflation Report was slightly less downbeat compared to the November report. Although the Bank of England still expects inflation to fall below target in the medium-term, it doesn’t expect the dip below 2% to be as deep as previous. It also added that the extent to which inflation will decline and the likely pace of moderation “remain uncertain”. Added to that its growth forecast was revised higher with the growth recovery pushed forward to Q1 from Q2 and Q3 previously. Some have taken this to mean that QE is not necessarily a given. However, BOE Governor King said that more stimuli is possible and even though the Bank owns close to a third of all UK Gilts it could still buy more.
He also added that any tightening ion policy would be detrimental to the overall economic recovery in the UK and since the bulk of public sector spending cuts won’t come into force until 2013 and 2014 the Bank will need to maintain an accommodative stance for some time. The pound has traded in a very tight range today. GBP/USD has traded between 1.5680 and 1.5720, it is moving with overall risk appetite although the revisions higher to the BOE’s inflation and growth estimates contained in its Inflation Report is limiting pound weakness. It also helped trigger the sell-off in EUR/GBP after it reached 0.8400 – a harsh resistance zone where EUR/GBP has faltered before.
Overall, the European session has been a bitty day, with no real trend noticeable and instead fairly tight ranges are prevailing. Whether or not risk can cling on is dependent on Greece.
France’s economy managed to stay above water in the last three months of 2011, while Germany didn’t contract as much as expected, although Italy slipped into a technical recession after its economy contracted 0.7% in Q4 after falling 0.2% in Q3. The market took the GDP data in its stride, after all everyone in the market expected weakness at the end of 2011 and now people want to know how quick the recovery will be in 2012. What was far more interesting were reports that French car maker Peugeot had apparently approached the ECB about EUR 1bn of loans that are backed by collateral. So has the ECB has replaced the entire banking system in Europe, or what?
We don’t know if this plan by Peugeot would be accepted, but it leads one to question the integrity of the ECB’s balance sheet in the wake of the LTRO programme. It also suggests that some corporates would consider cutting out the middle man (the banks) and going straight to the source of the funding - the ECB. This is another way of admitting that Europe’s banking sector is up the creek without a paddle, and the even though risk may be rallying post the ECB liquidity injection, banks in Europe are still in a critical state.
On the topic of central banks and liquidity the Bank of England presented its first Inflation Report of the year. The report came after some fairly depressing labour market data. Although the unemployment rate remained steady at 8.4% (the lowest level since 1995) the claimant count rate rose more than expected in January by 6.9k, vs. 3k expected. There are now 2.67 million people unemployed in the UK, which is an increase of 48,000 over the last 3 months. Added to that wage growth remains below the rate of inflation at 2% per year, which suggests that inflation will have to fall further to stimulate consumption.
The Inflation Report was slightly less downbeat compared to the November report. Although the Bank of England still expects inflation to fall below target in the medium-term, it doesn’t expect the dip below 2% to be as deep as previous. It also added that the extent to which inflation will decline and the likely pace of moderation “remain uncertain”. Added to that its growth forecast was revised higher with the growth recovery pushed forward to Q1 from Q2 and Q3 previously. Some have taken this to mean that QE is not necessarily a given. However, BOE Governor King said that more stimuli is possible and even though the Bank owns close to a third of all UK Gilts it could still buy more.
He also added that any tightening ion policy would be detrimental to the overall economic recovery in the UK and since the bulk of public sector spending cuts won’t come into force until 2013 and 2014 the Bank will need to maintain an accommodative stance for some time. The pound has traded in a very tight range today. GBP/USD has traded between 1.5680 and 1.5720, it is moving with overall risk appetite although the revisions higher to the BOE’s inflation and growth estimates contained in its Inflation Report is limiting pound weakness. It also helped trigger the sell-off in EUR/GBP after it reached 0.8400 – a harsh resistance zone where EUR/GBP has faltered before.
Overall, the European session has been a bitty day, with no real trend noticeable and instead fairly tight ranges are prevailing. Whether or not risk can cling on is dependent on Greece.