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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (13489)	10/15/2004 8:24:02 AM
From: zonder	Respond to of 116555

It looks like they are assuming the current highs in oil price are speculative and will subside once the "partners" (i.e. oil producers) will "live up to their responsibilities" (i.e. increase production any way they can).

To: mishedlo who wrote (13489)	10/15/2004 8:24:55 AM
From: zonder	Read Replies (2) \| Respond to of 116555

Just received this from a UK hedge fund. Explains Trichet's comments: ECB's Trichet Beginning To Retreat From The Tightening Bias During October, the ECB has gradually been finessing its monetary policy stance and moving - very gradually - away from its previously clear tightening bias. In a recent report ("ECB October Monthly Report Signals Change of Emphasis"), we noted that the ECB was now much less complacent about the economic growth outlook. Today Trichet gave an interview to Bloomberg which moved along a notch this process of distancing from a strict tightening bias. Of course, Trichet has to be careful to reflect what looks like a divided central bank Council. In particular, he has to be careful not to alienate the more hawkish (and powerful)members like Otmar Issing. However, as we will demonstrate, there is a very significant difference between what Trichet is saying now (about monetary developments) and what Issing was saying less than a month ago. What today's interview with Issing adds is a modified view of the "twin pillars" of ECB monetary policy i.e. the inflation and money supply targets. With regard to the balance of risks, it was until very recently the case that the ECB saw the sharp increase in the oil price as a greater threat on the CPI inflation front than on the economic growth outlook. Now, there is a nod towards economic reality in that the ECB is giving greater attention to the implications of the oil price moves as a threat to the economic growth outlook. Trichet today argued that, "The ongoing recovery is confirmed and is our working assumption. DESPITE THIS, RISKS, IN FACT HAVE INCREASED with the uncertainty that is governing petrol prices." So, the ECB is not yet ready to change its medium term economic forecasts BUT they are making the necessary adjustments to the short-term outlook and recognising that the balance of risk presented by oil is skewed more to the economic growth outlook than the CPI inflation outlook. As far as inflation is concerned, Trichet now argues that, "WE DO NOT CONSIDER THAT OUR POLICY IS TOO ACCOMMODATIVE GIVEN THE OUTLOOK FOR INFLATION." This is dangerous territory for Trichet in regard to the hawks but Trichet is subtle and he attempts to pacify them by throwing doubts about the movement in the oil price and also questioning the downward move in short-term (Euribor) interest rate expectations. Trichet argues that the oil market is "overshooting". On the downward move in short-term interest rate expectations, he argues, "What is extremely important for us is not necessarily that the futures market and the 3 month money market goes up and down but what is extremely important is that the inflationary expectations over two years, five years, 10 years basis are fully in line with price stability." This is a little bit disingenuous because , if we look at 2 , 5 and 10 year bond yields , they have also been moving in the same direction as short-term futures contracts. For example, the 10 year Bund yield has fallen by 50 basis points (to today's level of 3.866%) since the beginning of June this year. Perhaps the single most important change of emphasis is on the issue of money supply growth. Today, Trichet argued that he is "NOT WORRIED" about excess liquidity. This is impossible to square with Issing's often quoted recent complaint that the Eurozone is "SWIMMING IN LIQUIDITY". Conclusion : Trichet is reflecting a gradual change in emphasis in the ECB's balance of risks assessment. The ECB is gradually distancing itself from a clear-cut tightening bias. This does not imply at all that they are ready to cut rates but it does signal that the finger has come off the interest rate increase trigger for some months to come.