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

To: mishedlo who wrote (18167)	12/9/2004 9:47:11 AM
From: zonder	Read Replies (2) \| Respond to of 116555

ECB December Report - Desperate To Avoid Pressure To Cut Rates Today's release of the December monthly report from the ECB re-emphasises the tone of recent remarks from President Trichet and Issing. In essence, the ECB wishes to underline a tightening bias and the desperate desire to avoid being pressured into a rate cut in the near-term. Despite the macroeconomic evidence which suggests that a resurgent euro is tightening monetary conditions and that the Eurozone economy is currently growing at a rate well below potential (0.3% q/q in Q3), the Bank emphasises upside risks to inflation. The key to understanding the Bank's analysis is to understand their view on the inflation outlook in both the short and medium-term. In the short-term the Bank clearly states that, "The short-term outlook for inflation remains worrisome. At the current juncture, oil prices are having a sizeable impact on consumer prices in the euro area." What really matters here is their view of the medium-term outlook and the underlying i.e. ex-oil outlook. Here the picture is a little less clear. On the underlying inflation pattern, the ECB argues that, "..there is no significant evidence that stronger underlying domestic inflationary pressures are building up." So why does the ECB Council have a tightening bias? The answer is less than convincing. December's report argues that, "There are upside risks to price stability over the medium-term." So where do these risks come from? The report argues that, "Concerns relate in particular to future oil price developments and....to the potential risk of second round effects in wage and price setting throughout the economy." So the risk is from the labour market. We do not find this argument credible. With an unemployment rate of close to 9% in the Eurozone and a 10.5% rate in Germany, do we really believe that trade unions are in a strong position with regard to wage bargaining? The evidence is to the contrary. Trade unions are on the defensive, losing membership and prioritise job security rather than wage maximisation at this stage. Whenever the ECB wishes to underline a hawkish stance the monetary analysis is rolled out in support. The December report argues that, "AS a result of the persistently high growth of M3, there remains substantially more liquidity in the euro area than is needed to finance non-inflationary economic growth. This could pose risks to price stability over the medium-term." Conclusions : Despite the high exchange rate of the euro and the clear downside risks to economic growth in the Eurozone, the ECB is quite unambiguous that they are not prepared to countenance an easing of policy at this stage. Euro strength will be countered first by trying to talk the currency down (unlikely to be effective), then by FX intervention (unlikely to have more than a short-term effect unless the ECB persuades other central banks to participate). The ECB is proactively insulating itself against the demands for a rate cut. As former ECB President, Wim Dusisneberg once said, "We hear but we are not listening ."