ïƒ˜Greece unveils further
austerity measures, market jitters subside
ïƒ˜Snow storms thwart US labour market
ïƒ˜ECB signals end of full allotment in October
The situation in Greece has eased somewhat. Despite the ongoing strikes, the Greek
government this week unveiled plans for additional austerity measures
which go even further than those demanded by the EU. This has prompted some
market speculation that Greece could be paving the way for more concrete aid from its EU partners.
That speculation was fuelled by the fact that Greek prime minister George
Papandreou is meeting German chancellor Angela Merkel this Friday. Greece thus saw strong demand for its â‚¬5bn 10-year bond launched
on Thursday, yielding a whopping 6.4%. The bond was three times oversubscribed.
The euro rose initially on the slightly more favourable assessment
of the Greek debt situation.
The euro was probably also supported by the impending ECB
governing council meeting, at which the next steps to an exit from the
unconventional liquidity measures were to be discussed. The uncertainty could
have made market participants more cautious in the run-up to the meeting. Thus
towards the middle of the week, EUR-USD firmed to over 1.37. After the meeting,
however, the euro began to tumble, probably mainly because the ECB had not made
any unexpected announcements. Towards the end of the week, the euro was back
around 1.36 again and thus almost at the previous weekâ€™s level.
The news from the US was mixed again this week. The assessment of the economic
situation in the Fedâ€™s Beige Book remained basically unchanged. It was reported
that economic activity had improved in nine of the twelve regional districts, but
in most cases the increases were modest. Consumption, construction activity,
production and the agricultural sector had been hampered significantly by the
severe snow storms. Nevertheless, manufacturing activity had continued to
strengthen in most regions, and demand for services was positive. In some areas
not quite so badly hit by the winter weather, the housing market had firmed,
whereas the commercial property market and construction activity as a whole
were described as weak or declining.
The latest data confirm for the most part the description in
the Beige Book, which is more anecdotal. The ISM index for the manufacturing
sector fell slightly in February from 58.4 to 56.5, but is still indicating
solid expansion; the decline was primarily due to the fact that the
extraordinarily high levels of the new orders and production components in
January could not be sustained.The ISM non-manufacturing index rose
significantly over the expansion threshold, from 50.5 to 53.0, which is
encouraging. During the last few months, the important service sector had been lagging
far behind the manufacturing sector, also from an employment point of view. Now
the employment component in the nonmanufacturing index is approaching neutral, which
raises hopes that a turnaround on the labour market could be just round the
corner. Bearing in mind that weather conditions probably had a decidedly
negative effect on employment, the decline in non-farm payrolls by 36,000 in
February is quite moderate.
The ECB has for the most part confirmed its assessment of the economic situation. It is expecting a modest recovery and sees risks to price stability as balanced. The new staff
projections for the euro area foresee growth rates of 0.8% for this year and 1.5% for 2011. The forecast for next year has thus been raised by 0.3 percentage points. The inflation rate for 2010 has been adjusted marginally downwards to 1.2% and slightly upwards to 2011 to 1.5%.
The ECB governing council has announced further steps towards normalising money market
conditions. As from April, 3-month tenders will be offered at variable rates again, whereby the main refinancing rate will serve as the minimum bid rate. By contrast, weekly main refinancing operations and 4-week tenders will still be conducted as fixed rate tenders with full allotment. However, the ECB is only offering this unlimited access to liquidity until mid-October.
The main thing, in our view, is that the ECB is continuing its exit strategy â€“ slowly but surely.
When the negative impact of the exceptionally severe winter weather in the northern hemisphere diminishes, the upward trend in both the US and Europeâ€™s
economies will become more evident. That is likely to support the euro to some extent, particularly if Greece makes further progress in reducing its budget deficit.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NÃ¤fken
report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and
its affiliated companies (together "BHF-BANK Group") solely for the information
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