Europe heads into longest recession since 1995

NBK WEEKLY MONEY MARKET REPORT

The dollar continued its rally this week and took out 2012 highs aided by strong US consumer confidence. There was more talk of the ECB easing which helped global equity markets sustain a continuous increase. In the US, Sarah Bloom, a member of the Board of Governors of the Federal Reserve, said that the US Economy continues to recover from the effects of the financial crisis and deep recession, though at a slower than expected pace. Moreover, she added that the recovery appears to have picked up steam notably in the housing sector. Bloom noted that the latest tightening in the Federal Fiscal Policy that is represented in spending cuts associated with sequestration will likely hamper the improvement of the US GDP growth this year. Because of these factors, Bloom stated, “the Federal Reserve will continue to conduct monetary policy so as to promote a stronger economic recovery in the context of price stability”.

In Europe, the latest GDP data indicate that euro-zone is passing through the longest recession since 1995. Acting on Europe’s Financial Crisis, the French President Hollande outlined a two-year plan to give the euro-zone a centralized “economic government”. In the FX markets, the dollar maintained its upward momentum, with the USD index reaching a 3-year high of 84.37 against a basket of currencies. The strength in the dollar was attributed to the expectation that the European Central Bank could introduce negative deposit rate, which pushed the Euro currency to a six-week low of 1.2795.

The Sterling Pound started the week at 1.5384 only to lose momentum and drop to a low 1.5156 on worse than expected employment figures alongside comments from the Bank of England indicating that the UK economic recovery remains weak and uneven. The Japanese Yen continued its nine-month drop against the dollar, reaching a low of 103.30. On the Commodity side, gold started for the week at 1,448.19 only to find resistance and drop to a low of 1,355.10. The drop in gold was supported by worse than expected economic figures from China.

US consumer price index

US Consumer Price Index fell in April by the most in over 4 years, as fuel prices retreated. The CPI dropped 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March, according to Labor Department figures. The data came better than 0.3 percent drop economists forecasted. Signs of light inflation pressures could strengthen the case for the Fed to maintain its monetary policy path.

US producer price index

Producer Prices had its largest drop since April 2010 as gasoline and food costs fell, pointing to weak inflation pressures that should give the Federal Reserve room to keep monetary policy very accommodative. The seasonally adjusted Producer Price Index fell 0.7 percent last month, marking the biggest decline in three years. Analysts had forecasted a drop of 0.6 percent.

US industrial production

The US Industrial production declined in April by the most in eight months. A report from the Federal Reserve said that production at mines, factories and utilities dropped 0.5 percent, well below market expectations of a decline of 0.2 percent. The drop was attributed to the ongoing recession in the euro-zone and slower demand in China that has reduced the demand on US exports.

Europe German investment morals rise

The ZEW Indicator of Economic Sentiment for Germany has moved sideways in May 2013. Indeed, it rose to 36.4 points from 36.3 in April missing economists forecast of a rise to 38.3. The gain however was a significant improvement over last month’s steep fall from 48.5. The ZEW president said the sideways action was probably due to the latest interest rate cut by the ECB, however he expects a recovery to set in during spring and then continue towards the summer. He also said that the “conditions for Germany to enter recovery are very good”.

Euro-zones longest recession since 1995

The euro-zone’s Flash Gross Domestic Product fell 0.2 percent in the first quarter of 2013 slightly worse than the 0.1 percent contraction expected by economists. This is the sixth straight quarter of contraction and marks the longest EU recession on records since 1995. Economies in France, Italy, Spain, Finland and Netherlands shrank while the German economy managed to grow at 0.1 percent during the first quarter. Commenting on Europe’s Financial Crisis, the French President, Francois Hollande, outlined a two-year plan to give the euro-zone a centralized “economic Government”.

United Kingdom UK Unemployment

Britain’s unemployment rate increased to 7.9 percent in the three months ending in February, and wages growth slowed down to a record low, suggesting that the labor market is facing problems at a time when BOE is split on whether or not it should implement an additional stimulus package to create jobs and spur economic growth. Those who oppose the stimulus package are worried that it might cause an additional upward drift in inflation as well as weakening the Pound further.

Overview of the BOE Inflation

Report May 2013

In its Inflation Report for May 2013, the Bank of England noted, “the economic recovery remains weak and uneven. Domestic demand increased moderately during 2012, but this was largely offset by a pronounced fall in exports. Employment continued to grow strongly. The weakness of productivity suggested that the financial crisis may still be weighing on the current effective supply capacity of the economy as well as on demand”.

In regards to the Consumer Price Index, that BOE stated that “CPI inflation remains above the 2 percent target and is set to edge higher over coming months. Inflation is likely to stay above the target for much of the next two years, bolstered by external price pressures. Inflation is however expected to fall back to around 2 percent in the latter part of the forecast period, as external price pressures fade and a gradual revival in productivity growth curbs increases in domestic costs”.

Japan Gross domestic product better than expected

Japan’s economy expanded for a second straight quarter, as consumer spending and export gains improve driven by private consumption as the government’s aggressive economic policies, started to have a positive effect on the economy. Japan’s annualized GDP increase of 3.5 percent was better than median forecast of 2.8 percent growth. Private consumption that made 60 percent of GDP contributed 2.3 percent to the jump. Asian shares continued to climb after the Japanese economy indicated acceleration in the first quarter of 2013.

Japans private sector

machinery orders

Japan’s core private-sector machinery orders, which exclude volatile demand from electric utilities and for ships, jumped 14.2 percent in the month of March after a 4.2 percent jump in February, marking the second straight month-on-month gain, and the largest gain since April 2005. The improvement was due to the latest weakness in the Japanese Yen that helped increase exports and the rising stock prices that made investors more confident to invest.

Kuwait

The USDKD opened at 0.28650 yesterday morning.