Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Eurozone
Actions taken by the ECB have reduced risks in the eurozone. Leading indicators signal that output continued to contract
in Q1 2012, albeit at a slower pace than in Q1 2011. Going forwards, however, we do not expect output to be very buoyant,
as numerous factors will dampen activity. The recovery will be sluggish. Inflation figures have been revised upwards,
mainly due to higher-than-expected oil prices, but the overall downward trend should continue. Fragile economic
conditions and rising unemployment will insure that wage, cost and price pressures remain moderate. Under these
conditions, the ECB is expected to leave key policy rates unchanged for the time being.
No time for complacency
Back-door quantitative easing
Actions taken by the ECB have reduced risks in the eurozone since the turn of
the year. There were tangible risks of a credit crunch at the end of last year.
Financial market tensions create severe supply problems for credit institutions,
and these constraints are easily transmitted to the rest of the economy, given the
importance of the banking sector as a source of external funding for nonfinancial
companies. In line with its mandate to guarantee the smooth functioning
of the payment system, the ECB stepped in, providing the banking sector easy
access to liquidity via two special Longer Term Refinancing Operations (LTROs)
with 3-year maturities. With these actions, the ECB injected almost € 1 trillion
worth of liquidity. Huge amounts of liquidity, combined with a reduction of the
banks’ reserve requirement ratio (decided in December 2011), sharply increased
excess liquidity in the money market.
With better funding conditions for banks, their credit-quality assessments are
likely to improve as well. The banking sector’s CDS have been falling sharply.
Less stress on funding needs combined with excess liquidity should ease
tensions in the money market. OIS/BOR spreads have been narrowing sharply
since the beginning of the year, and this trend is likely to continue going forward.
The beneficial effects of ECB actions have not been limited to the money market.
Banks clearly used the liquidity to cover their positions. However, they also took
the opportunity to buy debt securities with higher interest rates than the expected
rate on 3-year LTROs. This rate is determined with reference to the Main
Refinancing Operations’ (MRO) average minimum bid rates (the refi rate) over
the life of the respective operation. Even assuming the ECB leaves its key policy
rates unchanged until the end of 2013 (see below), and then progressively raises
the refi rate on a quarterly basis by 25bp, the actual rate on this 3-year LTRO
would be only slightly higher than 1.25%. Consequently, yields on corporate and
many sovereign debt securities have been easing. In like manner, through its
non-standard lending measures, the ECB is producing the same effects as the
pure quantitative easing introduced by other central banks, such as the Bank of
England and the US Federal Reserve.
In the near term, the ECB is unlikely to launch other measures of this type. They
have probably achieved their goal of improving funding conditions for the
banking sector, thereby averting a liquidity crisis. Nevertheless, these effects
have not yet reached the real economy. Growth in lending to households and
non-financial corporations remains extremely weak. Credit institutions’ supply
constraints were clearly restricting lending to the private sector. Nevertheless,
banks had (and still have) to deal with weak demand. Domestic demand is
indeed being constrained by fiscal consolidation measures adopted by several
eurozone countries.
Although official figures have not been released yet, the fiscal deficit for the
eurozone as a whole was probably reduced by 2 percentage points in 2011
(nearly 4% of GDP), although, as usual, there were big differences between
member states. By the end of April, each country must submit its stability
program to the European Commission. Most still have sizeable efforts to make to
reduce their public deficits to 3% of GDP by 2013 (Greece and Ireland have until
2014 and 2015, respectively).
Despite their depressive short-term impact, credible measures to balance public
finances and boost long-run growth can help restore business and consumer
confidence, creating the conditions for a gradual recovery in demand. In addition,
the ECB can mitigate this negative short-term impact by maintaining an
accommodating monetary policy, thereby encouraging investment and
consumption.
As tensions in the market have eased, the ECB has gradually wound down its
controversial Securities Market Program (SMP), under which it buys debt
securities on the secondary market. This programme was initially launched as a
temporary measure to give member states time to build up European firewalls.
The European Stability Mechanism (ESM), a permanent bailout fund created by
eurozone member countries to bailout countries encountering financing distress,
will start up on 1 July 2012. In late March, the Eurogroup agreed to lift the
cumulative lending capacity of the EMS and its predecessor, the European
Financial Stability Fund (EFSF), to €700bn, from €500bn previously. After taking
into account the rescue funds already committed to Greece, Ireland and
Portugal, the fund's residual lending capacity is €500bn. A bigger budget was
widely expected, but the countries most reticent about increasing the fund
(foremost of which is Germany) insisted that after taking into account the
bilateral loans already granted to Greece (€53bn) and the funds lent by the EU
(€49bn), the eurozone's direct support for its members already amounted to
€800bn, or 8.5% of the eurozone's GDP. The start up of ESM should help
reduce tensions in the sovereign debt markets.
Given existing disagreements over SMP between the various members of the
ECB's Board of Governors, the programme is likely to remain dormant in the
weeks ahead, although it is unlikely to be abandoned. Indeed, should financial
market stress suddenly intensify, the ECB could use the SMP to react overnight,
while the ESM’s capacity to react promptly has not been tested yet.
Activity: tough periods ahead
Available indicators signal that output probably fell again in Q1 2012, albeit at a
slower pace than in the previous quarter. Output might swing back into growth in
Q2, as easing tensions loosen somewhat the extremely tight financial and
monetary conditions. Confidence will also benefit from better financial conditions.
Nevertheless, we do not expect buoyant GDP growth in the near term, as
numerous factors will dampen output. Leading indicators are no longer falling at
the same pace as in Q4 2011, and have levelled off at low levels; this suggests
that the recovery –as it is always the case following recessions caused by
financial crises –will be sluggish.
Unusually high uncertainty and persistently tight financial and monetary
conditions will strain investment, the most cyclical component of domestic
demand. Lacklustre capacity utilisation and earnings growth support this view.
Private consumption should also remain sluggish. The dynamics of disposable
household income does not favour a strong rebound in consumption.
Employment, a lagging variable of output, will probably fall over the coming
quarters, while inflation is expected to be higher than previously forecast. Lastly,
austerity measures will dampen household purchases over the coming quarters.
Exports will offset the weakness of domestic demand, at least to some extent.
Although fiscal shocks within the eurozone will hurt intra-zone exports, improving
conditions outside the eurozone should boost extra-zone exports. The US
recovery looks more solid than we previously assumed, and production in the
emerging countries should continue going strong.
Export-oriented economies like Germany will be the main beneficiary of the
better global outlook. Germany’s output will also be sustained by relatively solid
domestic demand – which, as we pointed out above, is something the other
eurozone countries will hardly experience in the short-run.
All in all, GDP growth is expected to be broadly flat this year. The recovery will
be sluggish. GDP growth is likely to gain some momentum in the second half of
the year, buoyed by easing tensions and a slight regain of confidence. This trend
should continue next year. Actions aimed at strengthening eurozone governance
may further improve confidence, eventually boosting activity. On the other hand,
if fiscal tensions intensify again, and oil prices continue to rise, then the outlook
for the eurozone will be much darker.
Inflation is easing, albeit at a slower pace
Near-term inflation forecasts have been revised upwards, due essentially to
higher-than-expected oil prices. Nevertheless, energy-related base effects
should continue to push headline inflation downwards over the forecast horizon,
although at a slower pace than previously expected. In addition, underlying
inflation will probably ease going forwards. There is still a good deal of slackness
in the economy. Survey data suggest that, despite the rise in input costs, output
prices continue to fall, signalling that firms must offer discounts to stimulate
demand. Lastly, there are very few risks, if any, of higher commodity prices
having second round effects on wages. Tough labour market conditions will
prevent wages from picking up.
All in all, wage, cost and price pressures are expected to remain moderate.
Inflation will average more than 2% this year, and should fall below this threshold
next year. The recent rise in oil prices has clearly increased the volatility of
inflation, but it is unlikely to undermine medium-term inflation expectations. With
the combination of mild inflation and a weak recovery, the ECB is likely to leave
key policy rates unchanged for an extended period of time. Yet if the downside
risks to growth and inflation threatened to materialize, the ECB might decide to
cut its key rates again.
Easing tensions since the beginning of the year have helped strengthen the
euro, which gained almost 5% against the dollar in Q1 2012. The euro could
continue to appreciate against the dollar in the quarters ahead, lifted by slightly
better conditions in the eurozone. In addition, although less likely than some
months ago, prospects for a further easing of US monetary policy can not be
completely ruled out, something that could weaken the dollar.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Eurozone
Actions taken by the ECB have reduced risks in the eurozone. Leading indicators signal that output continued to contract
in Q1 2012, albeit at a slower pace than in Q1 2011. Going forwards, however, we do not expect output to be very buoyant,
as numerous factors will dampen activity. The recovery will be sluggish. Inflation figures have been revised upwards,
mainly due to higher-than-expected oil prices, but the overall downward trend should continue. Fragile economic
conditions and rising unemployment will insure that wage, cost and price pressures remain moderate. Under these
conditions, the ECB is expected to leave key policy rates unchanged for the time being.
No time for complacency
Back-door quantitative easing
Actions taken by the ECB have reduced risks in the eurozone since the turn of
the year. There were tangible risks of a credit crunch at the end of last year.
Financial market tensions create severe supply problems for credit institutions,
and these constraints are easily transmitted to the rest of the economy, given the
importance of the banking sector as a source of external funding for nonfinancial
companies. In line with its mandate to guarantee the smooth functioning
of the payment system, the ECB stepped in, providing the banking sector easy
access to liquidity via two special Longer Term Refinancing Operations (LTROs)
with 3-year maturities. With these actions, the ECB injected almost € 1 trillion
worth of liquidity. Huge amounts of liquidity, combined with a reduction of the
banks’ reserve requirement ratio (decided in December 2011), sharply increased
excess liquidity in the money market.
With better funding conditions for banks, their credit-quality assessments are
likely to improve as well. The banking sector’s CDS have been falling sharply.
Less stress on funding needs combined with excess liquidity should ease
tensions in the money market. OIS/BOR spreads have been narrowing sharply
since the beginning of the year, and this trend is likely to continue going forward.
The beneficial effects of ECB actions have not been limited to the money market.
Banks clearly used the liquidity to cover their positions. However, they also took
the opportunity to buy debt securities with higher interest rates than the expected
rate on 3-year LTROs. This rate is determined with reference to the Main
Refinancing Operations’ (MRO) average minimum bid rates (the refi rate) over
the life of the respective operation. Even assuming the ECB leaves its key policy
rates unchanged until the end of 2013 (see below), and then progressively raises
the refi rate on a quarterly basis by 25bp, the actual rate on this 3-year LTRO
would be only slightly higher than 1.25%. Consequently, yields on corporate and
many sovereign debt securities have been easing. In like manner, through its
non-standard lending measures, the ECB is producing the same effects as the
pure quantitative easing introduced by other central banks, such as the Bank of
England and the US Federal Reserve.
In the near term, the ECB is unlikely to launch other measures of this type. They
have probably achieved their goal of improving funding conditions for the
banking sector, thereby averting a liquidity crisis. Nevertheless, these effects
have not yet reached the real economy. Growth in lending to households and
non-financial corporations remains extremely weak. Credit institutions’ supply
constraints were clearly restricting lending to the private sector. Nevertheless,
banks had (and still have) to deal with weak demand. Domestic demand is
indeed being constrained by fiscal consolidation measures adopted by several
eurozone countries.
Although official figures have not been released yet, the fiscal deficit for the
eurozone as a whole was probably reduced by 2 percentage points in 2011
(nearly 4% of GDP), although, as usual, there were big differences between
member states. By the end of April, each country must submit its stability
program to the European Commission. Most still have sizeable efforts to make to
reduce their public deficits to 3% of GDP by 2013 (Greece and Ireland have until
2014 and 2015, respectively).
Despite their depressive short-term impact, credible measures to balance public
finances and boost long-run growth can help restore business and consumer
confidence, creating the conditions for a gradual recovery in demand. In addition,
the ECB can mitigate this negative short-term impact by maintaining an
accommodating monetary policy, thereby encouraging investment and
consumption.
As tensions in the market have eased, the ECB has gradually wound down its
controversial Securities Market Program (SMP), under which it buys debt
securities on the secondary market. This programme was initially launched as a
temporary measure to give member states time to build up European firewalls.
The European Stability Mechanism (ESM), a permanent bailout fund created by
eurozone member countries to bailout countries encountering financing distress,
will start up on 1 July 2012. In late March, the Eurogroup agreed to lift the
cumulative lending capacity of the EMS and its predecessor, the European
Financial Stability Fund (EFSF), to €700bn, from €500bn previously. After taking
into account the rescue funds already committed to Greece, Ireland and
Portugal, the fund's residual lending capacity is €500bn. A bigger budget was
widely expected, but the countries most reticent about increasing the fund
(foremost of which is Germany) insisted that after taking into account the
bilateral loans already granted to Greece (€53bn) and the funds lent by the EU
(€49bn), the eurozone's direct support for its members already amounted to
€800bn, or 8.5% of the eurozone's GDP. The start up of ESM should help
reduce tensions in the sovereign debt markets.
Given existing disagreements over SMP between the various members of the
ECB's Board of Governors, the programme is likely to remain dormant in the
weeks ahead, although it is unlikely to be abandoned. Indeed, should financial
market stress suddenly intensify, the ECB could use the SMP to react overnight,
while the ESM’s capacity to react promptly has not been tested yet.
Activity: tough periods ahead
Available indicators signal that output probably fell again in Q1 2012, albeit at a
slower pace than in the previous quarter. Output might swing back into growth in
Q2, as easing tensions loosen somewhat the extremely tight financial and
monetary conditions. Confidence will also benefit from better financial conditions.
Nevertheless, we do not expect buoyant GDP growth in the near term, as
numerous factors will dampen output. Leading indicators are no longer falling at
the same pace as in Q4 2011, and have levelled off at low levels; this suggests
that the recovery –as it is always the case following recessions caused by
financial crises –will be sluggish.
Unusually high uncertainty and persistently tight financial and monetary
conditions will strain investment, the most cyclical component of domestic
demand. Lacklustre capacity utilisation and earnings growth support this view.
Private consumption should also remain sluggish. The dynamics of disposable
household income does not favour a strong rebound in consumption.
Employment, a lagging variable of output, will probably fall over the coming
quarters, while inflation is expected to be higher than previously forecast. Lastly,
austerity measures will dampen household purchases over the coming quarters.
Exports will offset the weakness of domestic demand, at least to some extent.
Although fiscal shocks within the eurozone will hurt intra-zone exports, improving
conditions outside the eurozone should boost extra-zone exports. The US
recovery looks more solid than we previously assumed, and production in the
emerging countries should continue going strong.
Export-oriented economies like Germany will be the main beneficiary of the
better global outlook. Germany’s output will also be sustained by relatively solid
domestic demand – which, as we pointed out above, is something the other
eurozone countries will hardly experience in the short-run.
All in all, GDP growth is expected to be broadly flat this year. The recovery will
be sluggish. GDP growth is likely to gain some momentum in the second half of
the year, buoyed by easing tensions and a slight regain of confidence. This trend
should continue next year. Actions aimed at strengthening eurozone governance
may further improve confidence, eventually boosting activity. On the other hand,
if fiscal tensions intensify again, and oil prices continue to rise, then the outlook
for the eurozone will be much darker.
Inflation is easing, albeit at a slower pace
Near-term inflation forecasts have been revised upwards, due essentially to
higher-than-expected oil prices. Nevertheless, energy-related base effects
should continue to push headline inflation downwards over the forecast horizon,
although at a slower pace than previously expected. In addition, underlying
inflation will probably ease going forwards. There is still a good deal of slackness
in the economy. Survey data suggest that, despite the rise in input costs, output
prices continue to fall, signalling that firms must offer discounts to stimulate
demand. Lastly, there are very few risks, if any, of higher commodity prices
having second round effects on wages. Tough labour market conditions will
prevent wages from picking up.
All in all, wage, cost and price pressures are expected to remain moderate.
Inflation will average more than 2% this year, and should fall below this threshold
next year. The recent rise in oil prices has clearly increased the volatility of
inflation, but it is unlikely to undermine medium-term inflation expectations. With
the combination of mild inflation and a weak recovery, the ECB is likely to leave
key policy rates unchanged for an extended period of time. Yet if the downside
risks to growth and inflation threatened to materialize, the ECB might decide to
cut its key rates again.
Easing tensions since the beginning of the year have helped strengthen the
euro, which gained almost 5% against the dollar in Q1 2012. The euro could
continue to appreciate against the dollar in the quarters ahead, lifted by slightly
better conditions in the eurozone. In addition, although less likely than some
months ago, prospects for a further easing of US monetary policy can not be
completely ruled out, something that could weaken the dollar.
No comments:
Post a Comment