Oil Falls as Eurozone's Economy Expands Less than Expected

By Roger Baettig | August 16 2011 6:41 AM

Oil prices retreated after rising yesterday as the market awaited the meeting between German Chancellor Angela Merkel and French President Nicholas Sarkozy regarding the sovereign crisis in the Eurozone. Spokesmen for both governments have already reiterated that joint issuance of Eurobonds would not be considered and discussions will focus on 'measures for better agreement of financial policies'.

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Sovereign debt problems in the Eurozone lingered even though the EU agreed on new measures to calm the market on July 21. There have been signs recently that the crisis has been spreading to core economies from the periphery. After US' debt ratings were downgraded, the market speculated that France's AAA rating was threatened. Intensifying worries and rising yield spreads have led to the upcoming meeting between Germany and France. While both countries rejected the possibility of joint Eurobonds, the idea has got more supports from other Eurozone leaders with Italy, Greece, Belgium and Luxembourg calling for the scheme. The market still hopes that Germany and France may eventually change their mind on the issue as the 17-nation region's economic outlook deterioratess

Eurozone's GDP growth eased to +0.2% q/q in 2Q11 from +0.8% in the first quarter. The market had anticipated a milder slowdown to +0.3%. Germany's economy surprisingly grew only +0.1% q/q in 2Q11, easing from a downwardly revised +1.3% a quarter ago. The market had anticipated a +0.5% gain. France said last week that the country's growth stalled in 2Q11 after a +0.9% increase in the prior quarter. Separately, the 17-nation region's trade deficit unexpected soared to 1.6b euro in July while June's deficit was revised to 0.8b euro from 0.6B euro.

Earlier in the day, headline inflation in the UK rose more than expected to +4.4% y/y in July from +4.2% a month ago. Elevated inflation has put the BOE is a difficult situation as policymakers have been torn between rising inflation and weakening growth outlook. Despite the higher-than-expected CPI in July, the BOE will likely keep the stance that inflation will moderate rapidly in coming 2 years and policymakers will probably favor easing monetary policy to boost recovery instead of tightening to curb inflation.

In the US, housing starts probably fell -4.62% to 600K while building permits dropped -1.94% to 605K in July. Industrial production might have climbed +0.5% in July, following a +0.2% gain a month ago.