Stag­nant EU growth, weak Ger­man sur­vey, lead to additional calls for fur­ther ECB stim­u­lus

Financial Mirror (Cyprus) - - FRONT PAGE -

The fall­out from ECB Pres­i­dent, Mario Draghi’s ex­plicit threat that the Euro­pean Cen­tral Bank may add fur­ther stim­u­lus in June was very much ap­par­ent in the cur­rency mar­kets, with the EURUSD con­tin­u­ing to be sold. De­spite Draghi in­spir­ing the EURUSD to de­pre­ci­ate by over 200 pips last week, af­ter stat­ing that if in­fla­tion lev­els con­tinue to dis­ap­point, the ECB would be “com­fort­able” act­ing in June, it was other eco­nomic data which raised eye­brows.

Last Tues­day, Ger­many’s ZEW Eco­nomic Sen­ti­ment recorded its low­est read­ing since Jan­uary 2013. The ZEW Sur­vey scored a 33.1, far be­low the 40.0 ex­pec­ta­tion. Bear­ing in mind Ger­many’s own GDP cor­re­lates to nearly 30% of the EU econ­omy, this alone woke up the bears. Fur­ther dis­may was caused when a pre­lim­i­nary EU GDP re­port sug­gested that EU growth in the past quar­ter re­mained un­changed, at 0.2%. It was hoped that the EU econ­omy would dis­play 0.4% ex­pan­sion. To­gether with the dis­ap­point­ing Ger­man ZEW Sur­vey, this led to fur­ther calls for ex­tra ECB stim­u­lus in June. EU CPI (in­fla­tion) re­mained un­changed, at 0.7%. All in all, the EURUSD is cur­rently sit­u­ated at a three-month low, just be­low 1.37.

Else­where, a dovish Mark Car­ney in­spired traders to sell the GBPUSD. Last Wed­nes­day, dur­ing the BoE’s in­fla­tion re­port, Car­ney em­phat­i­cally stated that de­spite UK eco­nomic data con­tin­u­ally sur­pass­ing ex­pec­ta­tions, the BoE were in “no hurry” to in­crease their bench­mark in­ter­est rates.

In pre­vi­ous weeks, a collection of im­pres­sive UK eco­nomic data had the bulls in full swing, with op­ti­mists hop­ing that the BoE would in­crease rates in late 2014. Car­ney made fur­ther dovish re­marks re­gard­ing the UK econ­omy over the weekend, stat­ing that the UK hous­ing sec­tor rep­re­sents one of the big­gest risks to the UK econ­omy, mov­ing for­ward. It ap­pears that Car­ney is at­tempt­ing to talk down the GBP, af­ter it touched a five-year high against the USD the week be­fore. Cur­rently, the GBPUSD is start­ing to move up­wards, af­ter reach­ing its low­est val­u­a­tion in two months.

In re­gards to the Asian mar­kets, dur­ing the pre­vi­ous week, the JPY sur­pris­ingly strength­ened. Ja­pan’s lat­est GDP re­lease showed that dur­ing the pre­vi­ous quar­ter, Ja­pan’s econ­omy ex­panded at is fastest pace in nearly three years. Over­all, Ja­pan’s econ­omy ex­panded by 1.5%, far be­yond the 1% ex­pec­ta­tion. Con­sumer ex­pen­di­ture showed a no­tice­able im­prove­ment, with con­sumers be­ing en­ticed to make pur­chases, be­fore the Ja­panese govern­ment im­posed a new sales tax in April.

The week ahead sees a vari­a­tion of Ja­panese eco­nomic data re­leased be­tween the 19th - 21st May. The ma­jor­ity of at­ten­tion is likely to be di­rected to­wards BoJ’s Gover­nor, Kuroda’s live press con­fer­ence, this up­com­ing Wed­nes­day. It is hoped that Kuroda will of­fer some sort of in­di­ca­tion on when the BoJ will look to in­crease their Quan­ti­ta­tive Eas­ing pro­gram. If Kuroda in­di­cates that fur­ther eas­ing could come as soon as next month, then JPY weak­ness is pos­si­ble. How­ever, if Kuroda states that the time­frame for fur­ther QE has not yet been de­ter­mined (like in pre­vi­ous months), then additional JPY strength could be forth­com­ing.

In ref­er­ence to the USD, con­fi­dence re­mains low in the Green­back, de­spite US eco­nomic data con­tin­u­ing to ex­em­plify im­prove­ments. For starters, last week’s Ini­tial Job­less Claims showed the fewest num­ber of ap­pli­ca­tions since 2007.

Last week, only 297,000 Ini­tial Job­less Claims were made, com­pared to the 325,000 ex­pec­ta­tion. Ad­di­tion­ally, there were signs that the US hous­ing sec­tor is start­ing to make progress. Com­pared to last month, Hous­ing Starts im­proved by 13% and Build­ing Per­mits by 8%. Re­cently, the Federal Re­serve had ex­pressed that a no­tice­able slow­down in the hous­ing mar­ket, was ham­per­ing progress to the US eco­nomic re­cov­ery. Per­haps more im­por­tantly to the Federal Re­serve, US CPI (in­fla­tion) climbed by 0.3% in April, their fastest CPI im­prove­ment in over one year.

Al­though the ma­jor­ity of US eco­nomic data was pos­i­tive last week, there was some dis­ap­point­ment in re­gards to con­sumer ex­pen­di­ture. Ad­vance Re­tail Sales came in at only 0.1%, quite some dis­tance from the 0.4% ex­pec­ta­tion. It is widely re­ported that con­sumer ex­pen­di­ture rep­re­sents around 70% of the US econ­omy and this led to some sus­pi­cions that US con­sumer con­fi­dence, re­mains low. Federal Re­serve leader, Janet

Amer­i­can cit­i­zens fill­ing for un­em­ploy­ment ben­e­fits, Yellen is ex­pected to give a speech at New York Univer­sity, this com­ing Wed­nes­day. Al­though is not yet known whether Yellen is sched­uled to ad­dress the US econ­omy, any ref­er­ences made, may pro­vide fi­nan­cial mar­ket vo­latil­ity.

WHAT TO WATCH THIS WEEK:

Over the last week, there was a high quan­tity of eco­nomic data re­leased to the gen­eral pub­lic. This re­sults in the week ahead, be­ing slightly less heavy on eco­nomic re­leases. How­ever, mar­ket eyes will be pay­ing close at­ten­tion to the re­lease of the Federal Re­serve’s FOMC min­utes this com­ing Wed­nes­day. Else­where, on Tues­day, the UK’s lat­est CPI fig­ures are re­leased. Right now, it is ex­pected that be­low tar­get in­fla­tion lev­els will val­i­date Mark Car­ney’s as­ser­tion last week, that the BoE are in no need to in­crease in­ter­est rates any­time soon.

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