11/4/17: Euro Area Growth Conditions Remain Robust in 1Q 17

Eurocoin, Banca d'Italia and CEPR's leading indicator of economic growth in the euro area has slipped in March to 0.72 from 0.75 in February, with indicator remaining at its second highest reading since 2Q 2010.

Combined 1Q 2017 growth indictor is now signalling approximately 0.7% quarterly GDP growth rates, carrying the breakout momentum from previous quarters (see chart above). This brings most recent growth forecast over the 2001-2007 average.

From growth dynamics perspective, the pressure is now on ECB to start tightening monetary policy:

Inflationary pressures are still relatively moderate, but rising:

29/12/15: There Are Two Ways 2016 Can Play Out for Euro Area Bonds

With the pause in ECB QE over the holidays season, bond markets have been largely looking forward to 2016 and counting the blessings of the year past. The blessings are pretty impressive: ECB’s purchases of government bonds have driven prices up and yields down so much so that at the end of this month, yields on some USD1.68 trillion worth of Government bonds across 10 euro area countries have been pushed below zero.

Per Bloomberg chart:

Value of bonds with yields below ECB’s -0.3% deposit rate, which makes them ineligible for purchases by the ECB, is $616 billion, just shy of 10 percent of the $6.35 trillion of bonds covered by the Bloomberg Eurozone Sovereign Bond Index. As the share of the total pool of marketable European bonds, negative yield bonds amounted to more than 40% of the total across Europe at the start of December (see here: http://www.marketwatch.com/story/40-of-european-government-bonds-sport-negative-yields-and-more-may-follow-2015-12-02).

Two questions weigh on the bond markets right now:
1) Will the ECB expand the current programme? Market consensus is that it will and that the programme will run well beyond 1Q 2016 and spread to a broader range of securities; and
2) Will low inflation environment remain supportive of monetary easing? Market consensus is that it will and that inflation is unlikely to rise much above 1% in 2016.

In my view, both consensus positions are highly risky. On ECB expectations. Setting aside inflationary dynamics, ECB has continuously failed to ‘surprise’ the markets on the dovish side. Nonetheless, the markets continued to price in such a surprise throughout 2015. In other words, current pricing is probably already reflecting high probability of the QE extension/amplification. There is not much room between priced-in expectations and what ECB might/can do forward.

Beyond that, my sense is that ECB is growing weary of the QE. The hope - at the end of 2014 - was that QE will give sovereigns a chance to reform their finances and that the economies will boom on foot of cheaper funding costs. Neither has happened and, if anything, public finances are remaining weak across the Euro area. The ECB has been getting a signal: QE ≠ support for reforms. And this is bound to weigh heavily on Frankfurt.

On inflationary side, when we strip out energy prices, inflation was running at around 1.0% in November and 1.2% in October. On Services side, inflation is at 1.2% and on Food, alcohol & tobacco it is at 1.5%. This is hardly consistent with expectations for further aggressive QE deployment and were ECB to engage in more stimulus, any reversion of energy prices toward the mean will trigger much sharper tightening cycle on monetary side.

The dangers of such tightening are material. Per Bloomberg estimate, a 1% rise in the U.S. Fed rates spells estimated USD3 trillion wipe-out from the about USD45 trillion valuation in investment-grade bonds issued in major currencies, including government, corporate, mortgage and other asset-backed securities tracked by BAML index:

Source here.

European bonds are more sensitive to the ECB rate hikes than the global bonds are to the Fed hike, primarily because they are already trading at much lower yields.

Overall, thus, there is a serious risk build up in the Euro area bond markets. And this risk can go only two ways in 2016: up (and toward a much worse blowout in the future) or down (and into a serious pain in 2016). There, really, is no third way…

3/12/15: Updating that Euro Donkey of Global Growth

While Mario Draghi kept talking justifying the course of ECB policy decisions (or indecisions, as some might want to put), the ECB released staff projections for GDP growth. Here they are, in full glory:

Source: @fwred 

So, that poverty of low aspirations has now been firmly replaced by the circular forecasts: 2015: 1.5% to 1.4% to 1.5%; 2016: 1.9% to 1.7% to 17.%, 2017: 2.1% to 1.8% to 1.9%, whilst inflation expectations are now ‘anchored’ in the proverbial ditch. Meanwhile, Mr Draghi says:

Just as the Euro went through the roof on USD side and with it, Europe's 'exports-led recovery' went belly up.

Though never mind. The bigger headache (that few Europeans can even spot) is that the ECB forecasts are talking about 'growth' at below 2 percent with all this QE and with inflation at extremely low end. Which makes the whole exercise of monetary and fiscal policies activism... err... academic. For as far as I know, no donkeys are allowed to compete in Kentucky Derby. 

23/3/15: Deflation... Dumbflation... It's Real Purchasing Power That Matters

I have written in the recent past about the bogus debate surrounding the 'threat of deflation' in the euro area. You can see my view on this here in the context of Ireland: http://trueeconomics.blogspot.ie/2015/02/27215-deflation-and-retail-sales.html and here in the broader context: http://trueeconomics.blogspot.ie/2015/02/18215-inflation-expectations-and.html.

And now Bloomberg weighs in with the similar: http://www.bloomberg.com/professional/kc-post/ecbs-failure-reach-inflation-target-blessing/

To quote: "The strengthening recovery [in the euro area] should add some inflationary pressure — although readings are likely to remain in negative territory for some months, with lower energy prices still feeding through the production pipeline. This month, the ECB revised down its 2015 inflation forecast to zero. Assuming nominal earnings grow at the same pace seen over the last few quarters, the upward trend in real pay should persist in 2015.

Households are likely to react — even if with some lag — to the purchasing-power bonus. Household consumption, which makes up about 55 percent of GDP, has been somewhat muted lately, only contributing to growth by an average 0.1 percentage point over the last seven quarters. That’s less than half what it used to bring in during the pre-crisis years. The re-emergence of this large growth driver should help to strengthen the 2015 recovery. Negative inflation is a welcome shortcut, meaning the region doesn’t have to wait for a decline in unemployment to see a revival in domestic consumption."

Bingo!

11/1/2015: ECB's Favourite Inflation Expectations Indicator is Smokin...

And here's a nice reminder courtesy of @SoberLook.com of the markets' view of 5-year-to-10-year forward inflation expectations for the euro area:

Note: 5y/5y inflation swap basically measures expected inflation for the period of between 5 years from now and 10 years from now (5 years over 5 years from now). Here is a note on its importance to ECB policy http://www.itcmarkets.com/news-press/itc-egbs-questions-regarding-draghis-reference-to-5y5y-forward-rate-and-inflation.

Needless to say, at ECB inflation target of 2% over the next 1-2 years, we should be expecting 5y/5y to be above 2% mark, not below it. And if previous (2004-2007 period) should be our guide for growth, we should be looking at 5y/5y swap rate at around 2.4%.

Which means the 'flashing red' indicator for ECB is now smoking.

20/12/2014: ECB, Inflation Expectations and Oil

There is much hype about the ECB not actively gunning for re-inflating the economy around. Which is understandable... as the fears of deflation are real. But it is also partially misplaced, as deflationary causes are a bit more complex and changing over time.

The main cause of the longer-term deflation is stagnant demand. This provides support for low level inflation base off which any negative shock to prices risks triggering a deflation. Here, in my opinion, ECB can do some helping, but not much.

The second cause, the shock to the downside, is oil price. And here ECB should do absolutely nothing, simply because lower cost of energy is neither caused by the monetary drivers, nor is hugely detrimental to the economy. If anything, lower cost of energy helps business margins and household budget, partially offsetting the stagnant demand.

Here's the link between Euro area inflation expectations and oil prices, courtesy of @ReutersJamie:

Yes, ECB is way off-target on its monetary policy: http://trueeconomics.blogspot.ie/2014/12/19122014-lots-of-talk-more-plans-little.html although the above begs a question if we really do want to see ECB balancesheet expanding so dramatically once again. Yes, ECB off-target on inflation. But no, ECB balancesheet growing is not a solution to the core problem holding European demand under water. Debt is, followed by lack of investment. And ECB can't help much with either. At least it cannot help by expanding it balancesheet.

31/7/2014: Deflationary Trap: Eurocoin Signals Slowing Euro Area Growth in July

July Eurocoin - higher frequency gauge of economic activity in the euro area published by CEPR and Banca d'Italia - is out. Headline number posted a decline from 0.31 in June to 0.27 in July, consistent with slower growth in the first month of Q3 2014.

As chart above shows, July reading is barely above the statistical significance line, suggesting that the slowdown is quite pronounced. As Eurocoin release indicates: "The negative impact of the fall in industrial production in May and of the weak performance of the stock market in July was partially offset by the flattening of the yield curve." In other words, save for the excessive exuberance in the bonds markets, the economy is showing substantial weaknesses going into Q3.

This means that while Q2 2014 projection is now for stronger growth at around 0.31-0.34% q/q, up on officially estimated Q1 2014 growth of 0.2%, Q3 2014 took off with a growth outlook of around 0.26-0.28%.

Current economic activity is sitting at around the rates compatible with November-December 2013. Barring any significant changes in HICP (although indications are, HICP will fall to 0.65% for July data), the ECB remain in the proverbial 'deflationary risks' corner:

UPDATED

To-date, while growth moved into positive territory over the last 12 months, inflationary dynamics have pretty much collapsed.

UPDATED

If July trend (falling activity) remains into August and September, we are looking at further worsening in the overall activity in the euro area and more pressure on inflation to the downside.

7/5/2014: Eurocoin Leading Indicator: April 2014

The latest Eurocoin leading growth indicator for the euro area is at 0.39 in April, statistically unchanged on 0.38 in March.

Q1 2014 forecast based on Eurocoin is now at 0.34% q/q growth and Q2 2014 forecast is now running closer to 0.38%.

In other words, things are slack.

Here are some charts:

Crucially, Eurocoin reading in April was driven by "favourable performance of the financial markets and by household and business confidence, although these were counterbalanced by the small downwards revision of euro-area GDP in the fourth quarter of 2013." Actual industrial activity and external trade data was not supportive to the upside.

In other words, much of the improvement in Eurocoin since December 2013 is down to financial and confidence effects and not to underlying real economy.

Monetary policy side and inflation remain stuck in slow-growth corner:

7/4/2014: Eurocoin March 2014: Q1 Growth Estimate at 1.4% y/y

I have not updated stats for Eurocoin leading growth indicator for euro area economy for some time now, so here's the latest.

In March 2014, eurocoin rose to 0.38, with Q1 2014 average reading of 0.35 and 6mo average of 0.29. In Q1 2013 the average stood at -0.18. Hence, Q1 2014 growth forecast is for 0.34% q/q expansion. Annualised Q1 2014 projection is for GDP growth of 1.39% and this compares against annualised contraction of 0.73% in Q1 2013.

Couple of charts:

7/4/2014: EU's latests dis-inspiring growth forecasts...

So German Ifo upgraded euro area growth forecasts for 2014 and the numbers are... well... dis-inspiring?

"The Eurozone recovery is expected to pick up in the first quarter of 2014 with a GDP growth rate of +0.4% (after +0.2%  and +0.1% respectively in the previous two quarters)." Blistering it ain't.

But wait, things are not exactly 'improving' thereafter: "Growth is forecasted to decelerate slightly in the following two quarters."

Actually, 2014 full year forecast is for 1.0%. I know, don't go running out with flowers and champagne on this one. It is lousy. And it is even more depressing when you pair it with a forecast of 0.8% for inflation.

I mean, good news: official recession is over. Bad news: the recovery is going to feel like stagnation this year. Bad news >> Good news. Doubting? See this table summarising growth forecasts by main components:

• Consumption is expected to rise by 0.5% - so euro area consumers (aka households) are lifeless for another year. Lifeless because Europe will remain jobless: "owing to fiscal austerity measures in some member States combined with a continuing labor market slack and slow growth in real disposable income."
• Investment is expected to rise 2.1%, which is good news as most of this is expected to come from capacity investment (equipment and tech, rather than building more shed, homes and hangars to accommodate for imports from China). You wanna have a laugh? Per Ifo: "Private investment will continue to grow over the forecasting horizon due to the increase in activity and the need for new production capacity after the sharp adjustment phase determined by the financial crisis." Let me translate this for you: things got so ugly during the crisis that old capital stock was left to deteriorate without proper maintenance and replacement. Now we are going to start replacing that which was made obsolete in the crisis. And we will call that growth. Or rather the 'Kiev Model of Growth': Torch --> Rebuild...
• Industrial production is expected to 'jump' 1.5% y/y which, when paired with consumption growth at 0.5% suggests that once again 2014 will see European workers toiling hard to provide luxury goods they can't afford themselves for the world's better-off, increasingly found outside of the euro area.

Ugly? You bet. Even before the crisis euro area wasn't known for healthy growth figures, but now, watch this recovery plotted in the following two charts:

If one ever needed an image of the culture of low aspirations, go no further - the above show that whilst growth is basically non-extant, a mere sight of anything with a '+' sign on it triggers celebrations in Brussels…

Oh, a little kicker: Ifo projections for growth and inflation are based on following two assumptions: "oil price stabilizes at USD 107 per barrel and that the euro/dollar exchange rate fluctuates around 1.38". Now, should, say Ukraine-Russia crisis spill over to deeper sanctions against Moscow, I doubt oil price will be sitting at USD107pb marker for long. And should Sig. Draghi diasppoint with (widely expected by the markets) QE measures, Euro/USD will jump out of that 1.38 range like a rabbit out of the proverbial hole chased by a hound. In either case, kiss the 'growth' story good bye...

There are more downside risks to this forecast than upside hopium in Mr. Rehn's cup of tea...

1/4/2014: An ECB challenge...

A quick chart plotting euro area's challenge on deflationary side. Taking annual average HICP indices rebased back to 100=1996 for a number of countries and positing the data against the same for the US:

You can clearly see downward divergence in the euro area starting from 2010 on...

31/10/2013: NAIRU or NDRU? Euro Area Inflation Hits 0.7% in October

So Euro area unemployment rate remained stuck at 12.2% in September, same as in August 2013 and up on 11.6% in September 2012. 18,451,000 Euro area residents were unemployed back in September 2012 and this rose to 19,447,000 a year later. Meanwhile, in the US, unemployment rolls fell from 12,093,000 to 11,254,000 and the rate dipped from 7.8% to 7.2%.

With inflation (HICP) coming at 0.7% in October, so we are now no longer in the Non-Accelerating Inflation Rate of Unemployment (NAIRU) environment, but rather closing on what I would call a Near-Deflationary Rate of Unemployment (NDRU)... welcome to the madness of European econo-politics, where the Central Bank is powerless to do much to re-inflate the economy and fiscal authorities are powerless to restart growth, while households and companies struggle under the weights of debts.

Two charts:

Leading growth indicator Eurocoin (see more detailed analysis in the next blogpost) has improved somewhat in October, but monetary policy remains stuck in zero-bound, zero-power corner. And ditto for inflationary signals:

We are now at the lowest rate since November 2009 when it comes to HICP.

Good news, ECB can now easily move to 0.25% rate... but will it? Ask Angela...

1/10/2012: ECB in two charts

ECB in 2 charts:

31/8/2012: Poor newsflow for Friday

Clearly confidence-instilling newsflow from the euro area today:

"Euro area annual inflation is expected to be 2.6% in August 2012 according to a flash estimate issued by  Eurostat, the statistical office of the European Union. It was 2.4% in July."

ECB is expected to downgrade EZ growth forecasts once again, per this report.

"The euro area (EA17) seasonally-adjusted unemployment rate was 11.3% in July 2012, stable compared with June. It was 10.1% in July 2011. The EU27 unemployment rate was 10.4% in July 2012, also stable compared with June. It was 9.6% in July 2011." So the contagion to EU10 from EA17 is now feeding through.

And a scarier chart on youth unemployment via ZeroHedge:

And two charts to remind you where we are heading:

All of which is pretty much summarized in another blog post on euro area growth, here.

29/6/2012: Eurocoin June 2012: Rotten Readings

Eurozone's latest lead growth indicator Eurocoin (CEPR and Banca d'Italia) has hit a new low for the year in June.


In June the €- coin index declined from -0.03% to -0,17%, indicating a further worsening of cyclical economic difficulties. The decline is due principally to the markedly worse results of opinion surveys of firms and households and, to a lesser extent, to trends in share prices.


Charts below:

My forecast, consistent with eurocoin data is for growth in Q2 of -0.25-0.37% in GDP, as per below:

The monetary policy remains stuck in 'ineffective' mode:

Rotten to the core!

13/3/2012: Agility of ECBleese

One has to simply admire the ECB's 'guarded optimism' of things improving, yet worsening at the same time. Here's the recent statement from Frankfurt full of pearls, like (emphasis mine):


"March 2012 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.5% and 0.3% in 2012 and between 0.0% and 2.2% in 2013. Compared with the December 2011 Eurosystem staff macroeconomic projections, the ranges have been shifted slightly downwards."


So: "According to recent survey data, there are signs of a stabilisation in economic activity, albeit still at a low level. Looking ahead, we expect the euro area economy to recover gradually in the course of this year."


Now, wait... is it 'shifting slightly downwards' from already unpleasant levels, or is it 'stabilizing'?




Then we have:


"Euro area annual HICP inflation was 2.7% in February 2012, according to Eurostat’s flash estimate, slightly up from 2.6% in January. Looking ahead, inflation is now likely to stay above 2% in 2012, mainly owing to recent increases in energy prices, as well as recently announced increases in indirect taxes. On the basis of current futures prices for commodities, annual inflation rates should fall again to below 2% in early 2013. Looking further ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited."


So: "Looking ahead, we are firmly committed to maintaining price stability in the euro area, in line with our mandate. To this end, the continued firm anchoring of inflation expectations – in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term – is of the essence."


And again, one can ask: 2.6-2.7% currently and staying above 2% in 2012 - that is medium term or short term? And why would inflation de-accelerate if the growth is to pick up per forecasts in 2013? Why would commodities price inflation taper off if global growth and indeed Euro area growth are to stabilize and even improve?


Then, of course, there's that statement that 'underlying price pressures should remain limited'. Followed by: "The March 2012 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 2.1% and 2.7% in 2012 and between 0.9% and 2.3% in 2013. In comparison with the December 2011 Eurosystem staff macroeconomic projections, the ranges for HICP inflation have been shifted upwards, notably the range for 2012."

28/1/2012: Eurocoin for January 2012

The latest leading indicator for euro area growth -Eurocoin - for January continues to signal recessionary dynamics, albeit at moderating rates of decline.

January Eurocoin rose to -0.14 from -0.20 in December 2011. Here are some charts:

Eurocoin is now in the negative territory for four consecutive months. 3mo MA is at -0.18, 6mo MA at -0.07, crossing into negative for the first time since the last recession. In January 2011 the indicator stood at +0.48. Quarterly rate of growth is now at -0.17 implying annualized contraction of -0.56%.

There is now, due to persistent negative reading, more consistency in eurocoin and ECB repo rate, but inflation-growth remain unbalanced when it comes to applying Taylor rule to ECB rate policy.

All in, the rates decision based on the leading indicator performance should be to stay put and await more significant moderation on inflation side. Mild bout of inflationary recession is still on the cards for the euro area for Q1.

30/12/2011: Eurocoin December 2011: recession + inflation

Eurocoin - euro area's leading indicator of growth environment - posted another disappointing month in December. December reading came in at -0.20, same as November with 'stabilization' accounted for by improvement in surveys-based indicators for industrial and services firms, offset by material deterioration in actual demand indicators. Core Q4 2011 forecast for euro area growth now moved to -0.2, dangerously close to establishing a full-blown statistical contraction in the economy. More significantly, current growth and inflation conditions pairing pushed ECB policymaking into a proverbial straight jacket corner: rates consistent with inflation remain in the region of 3-times higher than current rate, while rates consistent with growth conditions are about right for the current 1.0% rate.

Charts below illustrate.

3mo MA for Eurocoin is now at -0.18, against 6mo MA of +0.03. YOY Eurocoin is down 141% and the indicator remains at the lowest level since August 2009. Annualized growth rate is forecast is running at -0.798% and 6mo MA annualized growth rate is running at +0.117% (also the worst performance since August 2009).

25/11/2011: Eurocoin signals recession for the euro area

And so the euro zone is now most likely in a recession. That's right, the R word is back.

Today, CEPR released its composite leading economic indicator for November - eurocoin - and the measure has posted it second consecutive monthly negative reading on foot of six consecutive monthly declines. Here are the details.

Eurocoin fell to a recessionary -0.20 in November 2011, from -0.13 in October and +0.03 in September.  The 3mo MA is now at -0.1 and 6 mo MA declined to +0.148. A year ago, the indicator stood at +0.45. Chart below updates, including eurocoin-consistent forecast for growth.

The following charts show the ECB decision-making inputs:

So ECB rates consistent with current growth are in the range of 1.0-1.5% - basically bang-on the current rate. However, inflation remains sticky and all indications are it will come in at around 2.7% in November, suggesting that rate expectation is for no change at beast (optimal rates consistent with this rate of inflation is in the neighborhood of 4%).

The ECB dilema continues.

31/10/2011: Stagflation on Europe's doorsteps

Euro area preliminary inflation estimate came in today with October reading at 3.0%. This is the second month in a row with inflation anchored at 3.0% and coupled with the signs of a recession (see charts below showing eurocoin leading growth indicator for October at -0.13, signaling contraction in economic growth) we are now in the stagflationary territory.

 You can see the dramatic deterioration in inflation-growth dynamics year on year in the chart above. The chart below shows updated 'optimal' inflation-consistent zone for ECB rates at over 4.0% against the current rate of 1.50%.

The above suggests that the ECB is now boxed into the proverbial stagflationary corner - lowering rates to improve growth outlook will risk pushing inflation even higher, while hiking rates or even staying put at current rates risks continuing deterioration in growth fundamentals.