Sound bites: -0.6% Q4 Eurozone GDP dip presages triple trip recession

There is so much food for thought for the ECB in the latest Eurozone GDP drop. It presages a further escalation in the Eurozone crisis and must concentrate the ECB’s minds for another early cut in interest rates and more monetary stimulus coming down the slipway in the coming months. The ECB needs to move fast to stop the current downturn turning into a deeper economic rout. As it stands, double dip recession in the last five years risks slipping into a triple trip recession.

We are already half way there judging by the fourth quarter drop in output. Prospects for the first quarter look grim. Recent economic data and confidence surveys reveal a picture of continuing gloom. There is no chance of an early return to positive growth and the likelihood stands that the Eurozone will flat-line at best, or slip deeper into recession for the whole of 2013 in the worst case. The political backdrop looks grim. EU fiscal austerity looks set to extend for years. The markets are not out of the grip of Eurozone contagion tail risks. Consumer demand is being squeezed hard. Businesses are not in the mood to invest. And the global slowdown is putting a brake on Eurozone export prospects.

Pressure is mounting on the ECB to pull more stimulus out of the bag very soon. The odds of a rate cut are slender this week, but we will probably hear more from Draghi about the possibility of further liquidity measures coming on stream in the future. The ECB will need to join the Fed, the BOJ and the BOE on the Big Easy route to monetary expansion and economic reflation. It is all about co-ordinated teamwork now. The ECB should not delay too long on rate cuts and a quarter point ease should come on line in the next couple of months. In the coming months a move closer to zero interest rate policy should not be ruled out. The Eurozone crisis is snowballing and requires exceptional policy response. The Bundesbank will need to bite their lips.

Highlights 

• Economy shrinks 0.6 percent in Q4, quarter-on-quarter
• Economy contracts 0.9 percent year-on-year

Sound bites: Eurozone retail sales bounce 1.2% mom in January - no reason to celebrate

Eurozone retail sales still remain on a contractionary footing despite January’s 1.2% monthly bounce. The underlying retail sales trend remains decidedly lower, with no chance of near term recovery. If the ECB wanted to see a very clear barometer of the recession storm encircling the Eurozone, it is the collapse in consumer confidence in the last few years. Deepening fiscal austerity is taking a very deep bite out of consumer demand. There is a very sharp squeeze on real incomes from higher taxes and rising energy costs, exacerbated by unemployment at a record level in the euro area. The only way to turn this around is going to come through greater policy stimulus and stronger growth. This is not going to come via fiscal means as pressure remains on Eurozone governments to clear up their budgetary mess.

The finger continues to point at more easing from the ECB. This week may be too soon for the ECB to cut rates as it might be seen as hitting the panic button after the Italian elections. It does not want to be accused of moving for political considerations. But as sure as night follows day, the ECB will have to cut rates again soon and feed more quantitative easing into the beleaguered Eurozone economy to stop the recession turning into a complete rout. The directional bias for the euro will remain lower as the message sinks in that the ECB will be going exactly the same way as the Fed, BOE and BOJ in the coming months – and they will need to do QE in much bigger size than they have delivered so far.

Highlights

Euro Zone Jan Retail Sales 1.2 Pct M/M - (Reuters Poll Forecast 0.2 Pct)

Euro Zone Jan Retail Sales -1.3 Pct Y/Y - (Reuters Poll Forecast -2.9 Pct)

Euro Zone Dec Retail Sales Confirmed At -0.8 Pct M/M, -3.0 Pct Y/Y (Pvs -3.4 Pct)

 

Sound bites: UK services grow at fastest pace for 5 months

Maybe a small glimmer of hope showing through for the UK services sector amidst deepening gloom for the UK economy. Britain’s service sector showed a little more bounce in February, with the services PMI index expanding at its fastest pace in five months. The non-manufacturing PMI edged up to 51.8 from 51.5 in January. Taking into consideration the sharp dip in the manufacturing economy last month underlines that the UK economy is still in trouble. It is far too tenuous to suggest, taking the two PMI components together, that there was some uplift in activity in the first quarter. The upward movement in the UK services index in February is far too insignificant to offset the strong forces of recession taking a grip in the UK. Rising unemployment worries, the squeeze on real incomes, falling consumer confidence, deepening fiscal austerity and the weak global economic backdrop underline the deep-set problems for the UK ahead. The first quarter GDP numbers will be in negative territory and should confirm the UK economy is back in its third recession in the space of five years.The onus remains heavily on the Bank of England to deliver more quantitative easing ahead, with the first opportunity for the next tranche to come through at this week's Monetary Policy Committee

Highlights

                                             FEB   JAN          DEC   F'CAST
Services headline index       51.8   51.5         48.9     51.0
Business expectations         67.6   67.2         64.0  

Sound bites: Eurozone in dire duress

The Eurozone services sector remains in dire duress. Germany remains the one exception of positive economic activity, but everywhere else is sliding deeper into a sink hole of negative growth. The Eurozone remains subsumed by aggressive recession forces that look likely to extend all through 2013. It is going to take a much bigger policy spade to dig the Eurozone out of this mess. The ECB will be bound to consider more monetary stimulus measures at this week’s policy meeting. An interest rate cut is probably ruled out  this week. It would smack of a panic more too close to the Italian political crisis. Considering another rate cut soon will definitely be on the discussion agenda though. The ECB need to consider throwing the kitchen-sink of monetary expansion at this deepening economic crisis. Rising unemployment, falling new orders and economic confidence in deepening distress bear all the hallmarks of some Eurozone economies being irreparably damaged for years. Greece, Portugal, Ireland, Spain and Italy all fall into this camp in the next few years.

Highlights

Markit Eurozone Feb Final Services PMI 47.9 (47.3 Flash, 48.6 Jan)

German Feb Final Services PMI Index 54.7 (Flash 54.1, Jan Final 55.7)

French Final February Services PMI Rises To 43.7 (Flash 42.7, Jan Final 43.6), 2nd-Lowest Since March '09

Italy Feb Services PMI Falls To 43.6 (Jan 43.9, Forecast 43.6)

Spain Feb Services PMI Falls To 44.7 From 47.0 In Jan, First Monthly Drop Since September

Irish Feb Services PMI Drops To 53.6 From 56.8 In Jan, Lowest Since August 2012 Markit estimates euro zone GDP will shrink 0.2% in Q1

Forex bites: sterling in the firing line

Another weak UK PMI reading  and another grizzly election result for the British government highlight the pound’s mounting plight. Strong odds of another dip back into recession and rising political uncertainty underline the spreading risks ahead for sterling. It is not helped any by an audible back door whispering campaign from the Bank of England, primarily to help provide a boost UK exports via a more competitive pound. The chips are stacking up against sterling

A likely drop in first quarter UK output should confirm in a few weeks time that the third recession in five years has already begun. Hints from last month’s monetary policy committee, suggest the BOE could opt for more quantitative easing from as early as next week. Given King’s ringing endorsement for new QE, it is only a matter of time before fresh stimulus begins to flow again. And better sooner rather than later. Debt deflation and deepening fiscal austerity are dealing fatal blows to economic confidence. The BOE remains the last line of defence and need to pull a bigger weapon from their armoury. While market expectations are looking for an extra £25bn QE injection, a punchier £50bn may be more appropriate now.

Rising political uncertainty is also making its mark. The Eastleigh by-election result rang some worrying bells for PM Cameron’s Conservative Party. Rising grass-roots support for the euro sceptic UK Independence  Party will be an ominous spur pushing the Conservative Party into a more populist anti-EU slant. That is not good news for the pound in the long run. Question marks about the UK’s long run EU commitment are bound to unsettle overseas firms’ commitment to their own UK operations. A marginalised UK in Europe might pose a serious risk of an exodus of foreign direct investment out of the UK’s shores. Given the deep deficit on UK’s trade account, a threatened outflow of foreign capital would deal the pound a mortal blow.

With the pound poised on a key break below USD1.50 at the moment, the odds are mounting for a bigger break down in sterling sentiment in the weeks ahead. The weak economy, over-easy monetary policy and an uncertain political backdrop could lead the currency back down towards sub-USD1.40 territory quite quickly. The pound will stay down on its luck, with very little looming to pull it back up. Another euro crisis will make little difference for the pound as a safe haven play as it will probably suffer in tandem just by geo-political association.

Sound bites: a shock drop in the UK manufacturing PMI

The shock drop in the UK manufacturing PMI is another ominous sign for the UK economy. It tolls the bell for another shift back into recession. Double dip is now turning into triple trip recession. Consumer demand is heavily under water, corporate confidence is holed beneath the waterline and the squeeze on public spending is sinking the economy even further. It is up to the Bank of England to provide another lifebelt by way of further quantitative easing. UK monetary policy must stay easy and over-accommodative for a long way into the future. The pound will continue to bear the burden. That’s the good news in this data. The weaker pound will continue to provide more export led stimulus into the economy ahead.

KEY FIGURES FROM MARKIT/CIPS PMI SURVEY
(Previously announced data in brackets)

                                             FEB    JAN           DEC   F'CAST
Manufacturing headline index  47.9   50.5 (50.8)  50.7    51.0
New orders index                    46.6   49.7            51.1  

- First fall in overall activity since November - New orders index lowest since July - Employment index lowest since October 2009

Eurozone remains in the grip of recession

The tale of two economies continues to haunt the Eurozone. Manufacturing activity is just managing to keep a positive hold in Germany, but still falling into negative territory elsewhere. There are no signs of the Eurozone emerging from the grip of recession anytime soon. Germany is just about the only bright hope with PMI manufacturing activity rising to 50.3, just keeping a toe-hold in positive growth. But elsewhere the picture remains grim. Spain manufacturing perceptions recovered a little but still remain subsumed in a contractionary vein.  The French manufacturing economy remains stuck in a deep rut. Italy manufacturing sentiment is sinking again. At least there were some brighter signs in the Greek economy with the fall in new orders slowing and manufacturing confidence picking up a little from deeply weak levels. With the overall Eurozone manufacturing PMI stuck at 47.9 in February, the outlook remains bleak for any hope of near term economic recovery.

The picture remains very clear on the policy front. With so much potential demand being sucked out by Eurozone-wide fiscal austerity, it’s up to the ECB to keep policy on very easy settings for  long while. The odds are the ECB will have to cut rates again as soon as the next policy meeting. The bias remains firmly pointed towards more easing, more monetary stimulus and the need for a lower euro. It’s a question of all hands to the monetary pumps now.

Highlights

GERMAN FEB FINAL MANUFACTURING PMI 50.3, HIGHEST SINCE JAN 2012 (FLASH 50.1 JAN FINAL 49.8)

FRENCH FEB FINAL MANUFACTURING PMI RISES TO 43.9 (FLASH 43.6, JAN FINAL 42.9)

ITALY FEB MANUFACTURING PMI FALLS MORE THAN EXPECTED, TO 45.8, LOWEST IN 3 MONTHS (JAN 47.8, F'CAST 47.5)

SPAIN FEBRUARY MANUFACTURING PMI RISES TO 46.8, HIGHEST SINCE JUNE 2011, FROM 46.1 IN JANUARY