Euro Pressured as Growth Comes in Weak
Euro zone GDP data came in weaker than expected that pressure the euro is trading. Most of decline was led by slower than expected growth in Germany where growth was up 0.2% much lower than 0.5% expected. That has increased worry about slower growth not only in Europe but also in the wider global economy.
The news put a dent into European equities and turned US futures lower after a day of rally yesterday session. The prospects for the second half of the year are not favorable because of austerity packages in countries such as Italy and Spain, which are likely to hamper growth. Also the longer that the turbulence around the European sovereign debt crisis continues the worse it will be for business confidence and consumer confidence and therefore economic activity.
From Bloomberg: "Gross domestic product in the 17-nation euro area rose 0.2 percent from the first quarter, when it increased 0.8 percent, the European Union's statistics office in Luxembourg said in a statement today. That's the worst performance since the euro region emerged from a recession in late 2009. Economists had forecast the economy to expand 0.3 percent, according to the median of 34 estimates in a Bloomberg News survey. GDP rose 1.7 percent from a year earlier.
Adding to signs of slowdown, European manufacturing growth eased in July and economic confidence slumped to the lowest in almost a year. German investors were the most pessimistic in 2 1/2 years last month and executive confidence also weakened. Industrial output unexpectedly dropped in June."
At the same time we had disappointing data coming out for the trade balance for the month of June as both imports and exports fell for the month. That cause the euro zone to have a trade deficit of around €1.5 billion. Expectation had been for a slight surplus.
All in all we saw the EUR/USD dollar pair fall from the 1.4470 highs that we saw late yesterday and the 1.4450 level which we closed yesterday's global session at all the way down to 1.4370 around the open of New York.
UK CPI Climbs, But King Warns of "Severe"
Inflation in the UK picked up in the July with the annual rate up to 4.4% from 4.2% seen in June and a bit stronger than what we had expected from forecasts. On the month inflation was flat. The rise in prices was led by the cost of clothes and footwear, housing maintenance and rent.
The BOE Governor sent a letter to Chancellor of the Exchequer George Osborne after inflation remains above 3%. the governor must write to the Chancellor every three months when inflation rate strays more than a percentage point from the bank's target. We know from past BOE forecasts that they expect inflation to peak at around 5% in the short term though their concern now is that inflation will fall below the 2% target in the medium-term. Here is a rundown of some of the important quotes from King's letter
- "Recent developments in world stock markets and in the euro area are of particular concern".
- There is a risk of "severe stress and dislocation financial markets and, where this risk to crystallize, would have a significant impact on the UK economy."
- In "responding to those risks, or indeed to other risks in either direction, the NPC can use bank rate or asset purchases to achieve its objectives."
- "Inflation will continue to be sensitive to fluctuations in global commodity and trade prices, but recent evidence of a moderation global growth suggests that the risk of significant increase in those prices have diminished somewhat."
The main gist here and one with which George Osborne agrees is that the UK is not immune from the financial storm we see in the euro zone. therefore the central bank is keeping a vigilant eye on developments and will be ready to use further monetary stimulus if needed. At the same time the central bank does not feel that global commodity and trade prices should continue to rise significantly as global growth has diminished.
Chief Market Analyst