further interest rate cuts, but still sceptical about zero rates
in the eurozone drops more sharply than expected
USD: Strength through weakness
the beginning of the week, equity markets recovered slightly from the previous
This was partly due to a few more positive reports from the corporate sector,
and plans to recapitalise
some financial companies, but the prospect of the US
economic stimulus package and the impending FOMC meeting probably also played a
part. On the currency markets, where last
week increasing safe-haven demand had boosted the dollar and the yen, the euro,
sterling and other European currencies gained ground initially. Towards the
middle of the week, EUR-USD climbed over 1.33 at times; USD-JPY, for its part,
firmed to over 90. This counter-movement
did not last long, however. Given the disappointing economic data and the prospect
of dismal Q4 GDP figures on Friday, the dollar and the yen strengthened again
to around 1.28 and just under 90 respectively.
dropped below 1.49, after SNB president Jean-Pierre Roth made some relatively
laidback comments on the francâ€™s appreciation. The pound, which had plummeted
the previous week, staged a significant recovery. GBP-USD rose by around 6
cents to 1.42, whereas EUR-GBP fell from 0.94 to about 0.90. The New Zealand
dollar, on the other hand, took quite a battering: not only did the central
bank cut interest rates much more drastically than expected (by 150 basis
points to 3.50%), but it also hinted that further interest rate cuts were
likely. NZD-USD dropped from 0.53 to 0.51.
Weak economic data
economic data released this week were weak for the most part. Existing Home
Sales brought a tiny glimmer of hope at the beginning of the week, posting a
significant increase, albeit after having
plunged to a record low in November. However, these were followed later in the
some extremely weak figures. Consumer confidence fell to an all-time low of
38.6 in January; in December, durable goods orders posted a bigger- than-expected
drop of 2.6% month-on-month, and furthermore, the reading for November was
revised down markedly. Last week, initial jobless claims were at just under
590,000 again, which bodes ill for the January labour market report.
data from other countries were not much better either. In Japan,
industrial production plummeted again by almost 10% compared to the previous
month. In the fourth quarter, production fell by an average of 11.9%; moreover,
at the end of Q4, production was already 9.5% below the average level for Q4
again, which does not bode well for the first quarter. In addition to this, a
sharp turnaround seems to be taking place in the Japanese labour market: in
December, the unemployment rate rose from 3.9 to 4.4%.
the eurozone, things are still looking bleak too. Admittedly, the ifo business
climate did improve slightly in January, from 82.7 to 83.0. However, one
shouldnâ€™t read too much into this: at the current level, stabilisation only
means that the economic downward movement is no longer accelerating. It should
also be borne in mind that business expectations are responsible for the
improvement in the business climate. The retail trade, the construction
industry and part of the manufacturing sector are apparently hoping that the
German governmentâ€™s economic stimulus package will provide fresh impetus.
Downside risks to price stability in
next Thursdayâ€™s meeting, the ECB governing council is likely to discuss the
latest inflation and monetary developments. In January, inflation slowed down
significantly again. According to Eurostatâ€™s flash estimate, the inflation rate
fell from 1.6 to 1.1%. A detailed breakdown of the figures is not yet
available, but, in our view, this is not likely to have been due to energy
products alone. In the past months, prices for the important core products in
the basket of goods had already started falling. Against this backdrop, the ECB
is likely to find it increasingly difficult to maintain its assessment of
balanced price risks. We ourselves see the inflation rate nearer to 1 than 2%
crisis has had a significant impact on monetary data too. In November and
December, money supply growth practically came to a standstill, the previous
yearâ€™s rate declined to 7.3%. The fall in book credit is even more pronounced: up
until September, the figures had been relatively normal; but since October,
lending has virtually come to a halt.
the last few days, ECB president Jean-Claude Trichet has once again signalled
that there will be a thorough review of monetary policy stance in March.
Neither an interest rate cut nor any great change in monetary policy assessment
are likely at next Thursdayâ€™s meeting. Nevertheless, the position appears to be
changing in the council: initially, ECB representatives had hinted that there
was less scope for interest rate cuts below 2%; now President Trichet himself
is indicating that the ECB is not at the moment considering â€śvery, very low
interest ratesâ€ť or â€śzero interest ratesâ€ť.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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Mon 23 July 2018 A 14:00 US- Existing Homes Sales Tue 24 July 2018 AFlash PMIs Wed 25 July 2018 A 08:00 DE- IFO Survey A 14:00 US- New Homes Sales A 14:30 US- EIA Crude Thu 26 July 2018 AA 11:45 EZ- European Central Bank Decision A 12:30 US- Weekly Jobless A 12:30 US- Durable Goods Fri 27 July 2018 AA 12:30 US- GDP A 14:00 US- Final University of Michigan
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