data indicate record decrease in GDP
Icy economic climate
thin trading in the last two weeks of 2008, EUR-USD was relatively
unspectacular at around 1.40. However, in the first full trading week of the
new year, the market started gathering steam again: the pound was this weekâ€™s
winner; it rose significantly against the dollar and the euro. GBP-USD gained
over 5% to 1.53, EUR-GBP fell more than 6% to about 0.90. The sharp movement
appears to have been due to sizeable short positions in pounds, which had been
built up during December, being closed prior to the BoEâ€™s interest rate
decision. Some economic indicators, such as retail sales, had not been quite as
bad as expected, which is also likely to have played a part. Furthermore, it
was uncertain how big the central bankâ€™s rate cut would be. And in fact the
bank rate was â€śonlyâ€ť cut by 50 basis points to 1.50%.
was some movement in EUR-USD too. By Tuesday afternoon, the euro had dropped by
around 6 cents to just over 1.33. The momentum in the dollarâ€™s favour was
triggered by equity markets, where risk appetite appeared to have increased
somewhat at the start of the new year. First and foremost, the new US
economic stimulus package gave rise to some premature optimism. Barack Obama,
who will be inaugurated as US
president on 20 January, and the new Congress, which now has a Democratic
majority, are working full steam ahead on a massive stimulus package. It is
reported that this package, which is to be passed by mid-February, will be in
the region of $775bn, i.e. about 5% of GDP, and run for two years. Compared to
that, the German governmentâ€™s new â‚¬50bn stimulus plan looks relatively modest.
the second half of the week, however, the mood became more subdued again.
back, and the dollar weakened. Towards the end of the week, EUR-USD was around
1.37. Markets were brought back down to earth by the economic data coming in:
the ADP indicator showed a record loss in December of almost 700,000 jobs in
private sector. In the eurozone, the economic data published were disastrous: in
November, German exports slumped by over 10% month-on-month, and industrial new
orders in the manufacturing sector plunged by
as in October. German industrial production fell by 3.1% in November. If
production remains unchanged in December â€“ and this is by no means certain â€“
there would be a quarter-on-quarter decline of 5.0% in Q4. in France,
things look even worse: there, the quarter-on-quarter decline in Q4 would be
the worst fears for the fourth quarter seem to be coming true. The current
there could be a quarter-on-quarter drop of up to 2% in German GDP in Q4.
Things do not look much better for the eurozone as a whole either. What is
particularly scary, however, is that the trend throughout the whole of Europe
is still pointing downwards. The EU Commissionâ€™s survey results, for instance,
deteriorated sharply again in December. The economic sentiment indicator
plummeted from 74.9 to 67.1. That is the lowest level by far since 1985 when
these figures started being recorded.
December, the ECB governing council had emphasized that the interest rate
was â€śopenâ€ť. After the meeting, some council members had even signalled that
they would prefer to leave interest rates unchanged in January. However, the
latest data are so bad, that we now think a 50 bp interest rate cut is the most
likely option next Thursday. Even Bundesbank president Axel Weber, one of the
hawks, admitted in a recent speech that some of the downside risks listed in
the December projections of the Bundesbank and the Eurosystem, had already become
evident, and that the last quarter of 2008 was likely to turn out worse than
previously expected. The economy was not likely to pick up again until 2010.
is still not clear, however, what course of action the ECB will take on
Thursday. If interest
are cut, the ECB will probably try to diminish further interest rate cut expectations,
as it did in December. If, on the other hand, the central bank leaves interest
rates unchanged, it will at least have to acknowledge additional growth risks
and thus indicate its willingness to cut rates.
will therefore be no clear signals for the markets. But, regardless of how the
ECB acts on
economic developments will in the end force monetary policy to reduce interest
rates further. The interest rate cycle in the eurozone still has a long way to
go before reaching its trough.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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