Thursday, August 07, 2008
As virtually every reader will no doubt recall, it was only last month that the European Central Bank put up interest rates. So it would naturally appear to be premature to start looking for a policy easing, particularly with Eurozone harmonized CPI printing another fresh high- more than double the ECB's target.
To be sure, playing for an ECB policy easing has been one the "widowmaker" trades of 2008, perhaps taking a back seat only to "BOE easing" trades. Yet Macro Man cannot help but wonder if a tiny light might appear at the end of the tunnel in today's press conference.
For clearly the activity data has been poor, much worse than expected. It's all well and good for IG Metall to demand this or that, but if Germany's economy has hit the wall to the degree suggested by the recent stats office leak (-1% q/q growth in Q2), then their bargaining power will be pretty small.
More importantly, Trichet and co. should connect the dots and see what's happened since the July meeting, where they hikes rates but spoke more dovishly than expected. Sure, the euro is a bit lower, which would be inflationary, all else being equal. But all else isn't equal. The oil price has come off more than 20%, which, if maintained, would significantly reduce the forward-looking inflation threat. (Part of this is likely also a function of the China slowdown theme highlighted in the previous post.)
Trichet is fond of saying how 320 million Europeans trust him and his colleagues to maintain stable prices. But the ECB would do well to put on their forecasting hats today and offer up a little light in August. Otherwise, they might find that each of those 320 million Europeans places a portrait of M. Trichet in their homes.....in a place of honour, attached to a dartboard.