Eurozone Growth is Slowing
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Edward sums up excellently at Bonobo Land ...
'Despite all the apparent optimism you can find round and about, the Eurozone is in fact slowing, the latest industrial output data from France seem to make this abundantly clear. What I find hard to understand is how so many people can have been wrong-footed on this.
(...)
The worst offenders are definitely over at Morgan Stanley. Steven Roach leads the way, but Eric Chaney isn't far behind. And Brad Setser - and in particular his guest poster Charles Gottlieb of the Center for European Policy Studies (CEPS also seems to be way off target here) - seems to have fallen hook line and sinker.'
Also the recent inflation data coming out of Germany tells an important story; the interesting thing here is obviously that the ECB is still bend hell on raising those rates.
(From Bloomberg)
'The inflation rate in Germany, Europe's largest economy, dropped to the lowest level in more than 2 years in September after oil prices retreated from a record.
Consumer prices rose 1.1 percent from a year earlier after increasing 1.8 percent in August, the Federal Statistics Office in Wiesbaden said in a faxed statement, using a harmonized European Union method. Economists expected an inflation rate of 1.2 percent, according to the median of 28 estimates in a Bloomberg News survey. From August, consumer prices fell 0.4 percent.'
(...)
Inflation is being topped and tailed by the recent sharp drop in crude oil prices,'' said David Brown, chief European economist at Bear Stearns International Ltd. in London. ``The expected slowdown in euro-region inflation should not stop the ECB hiking to 3.5 percent in this cycle, but it should make the ECB think long and hard about raising rates any higher next year.''
At least seven ECB policy makers, including President Jean- Claude Trichet and Germany's Axel Weber, said in the past two weeks they'll exercise ``strong vigilance'' against rising prices, words used in the past to signal a rate increase is imminent. The ECB expects inflation to exceed its limit of just below 2 percent for an eighth straight year in 2007.'
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And don't miss this which is in Bloomberg this morning (see below). It is very hard to read what is happening to US treasuries and corporate bonds at the moment, but with the pace ofthe movement you have to consider the possibility that this raising cycle may now have peaked, and the next moves may be down (sometime in early 2007??).
The key data to watch IMHO are: the evolution of US traesuries, oil and commodity prices, and the US housing market. People may not like to hear this, but this is where the next moves in the global economy will be played out.
<b>Federal Reserve to Cut Rates in 2007, Corporate Bond Sales Show</b>
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While economists debate whether the Federal Reserve will cut its target interest rate for overnight loans between banks from 5.25 percent, investors have already decided the central bank will reduce borrowing costs next year.
Nowhere is that clearer than in the market for floating-rate notes, whose interest payments rise and fall with central bank policy. Sales of so-called floaters are slowing for the first time since the Fed started raising interest rates in June 2004. They've fallen to $21.5 billion in September from a monthly average of $35 billion this year through August, according to data compiled by JPMorgan Chase & Co.
``People had bought floating-rate debt to be defensive,'' said William O'Donnell, chief interest-rate strategist at Stamford, Connecticut-based UBS Securities LLC, one of the 22 primary dealers of U.S. government securities that trade with the Fed. ``Now, they're buying fixed interest to be what I'd call offensive and betting on lower interest rates.''
Floating-rate note sales are falling even though they yield an average of 5.61 percent while bonds with fixed interest pay 5.54 percent, according to Lehman Brothers Holdings Inc. in New York. Over the past five years the benchmark for floaters has been higher than 10-year Treasury yields just 15 percent of the time, data compiled by Bloomberg show. Floaters lose value when rates decline because they pay less, while bonds with fixed rates become relatively more attractive.