Mish's Global Economic Trend Analysis Message Board

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next

From: zonder	3/3/2005 10:34:08 AM
	Read Replies (4) of 116555

ECB's Trichet - Cautious Tightening Bias The press conference after today's no-change decision on interest rate marked some subtle change in analysis from the ECB. While Trichet did not make any radical shifts in view and especially in terms of the tightening bias, there was a more cautious tone to his comments. In terms of the overall bias - little has changed as the following quote testifies - "Everyone knows that we will have to raise rates some time." He also indicated that the ECB did not discuss a rate-cut at today's meeting. Whereas last month's press conference had been dominated by talk of "excess liquidity" and the dangers of an asset price bubble developing in the housing market of some regions of Euroland, today's discussion was much more subdued. Indeed Trichet argued today that house price increases, "are not alarming at the Euro-12 level". Most importantly, Trichet identified weakness of consumer spending as an issue of concern. He described consumer spending as "insufficiently dynamic". It is not entirely surprising that Trichet was sounding cautious. After all, the real economy data is decidedly weak. The GDP data in particular is very soft. The latest data for Q4 indicate a clearly below-trend rate of growth of 0.2% q/q following a downwardly revised rate of 0.2% in the previous quarter. At the same time, the ECB revealed small downward revisions to both their GDP and CPI inflation forecasts. The Bank now has a central forecast for GDP in 2005 of 1.6% (compared to 1.9% in the previous - December forecast) and 2.1% for 2006 (previously 2.2%). Likewise there is a small downward revision to the 2005 CPI forecast which is now looking for 1.9% (2.0% previously) and an un-revised central forecast of 1.6% for 2006. While there have been small downward adjustments to the forecasts and Trichet has adopted a more cautious tone in his assessment, he still sounds a little too optimistic on the growth outlook from our perspective. Trichet could not help trying to put a positive spin on the growth outlook in his comments. This was particularly evident in his comments on consumer spending. Despite saying that consumption has been "insufficiently dynamic", he noted a degree of optimism by commenting on the sharp improvement of consumer expenditure in Q4. This is a little disingenuous. The previous two quarters had shown virtual stagnation (0.0% in Q2 and 0.1% in Q3) and the seven quarters prior to Q4 2004 averaged 0.2% growth. More significantly, Trichet did not indicate that the "strong" Q4 consumer spending number for the Eurozone was flattered by an upward spike in French consumer spending. French consumer spending grew by 1.2% q/q. This was an aberration. The previous three quarters averaged only a third of the rate of growth in Q4 and was accounted for by the "Sarkozy effect" i.e. the changes in savings and tax laws to give a one-off boost to consumption. Conclusion: Trichet is sounding more cautious but the influence of hawks such as Issing is still evident in the deliberations of the ECB Council. However, converting a tightening bias into the actual decision to raise rates is going to take a little longer than Dr. Issing would wish.

Report TOU Violation

Share This Post

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next