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Ugly Data Look Set To Block Euro Gains. By Nicholas Hastings.
LONDON (Dow Jones)--So far, so bad for the data flowing from the
euro zone this week.
Tuesday's purchasing managers' index showed that clouds are gathering over the region's growth prospects, batting the euro sharply lower. Grim retail sales data for
December certainly didn't help either.
Although the currency hasn't dropped below its range for the year, it looks like further gains for the euro from here will be tough.
Gilles Moec, a European economist at Bank of America in London, noted that with the services PMIs so closely linked to consumer spending, this disappointing set of data
is particularly unsettling.
"(The) reading may come as a call to reason," he said in a note to clients. Sure, he said, the euro zone may be able to dodge the economic booby traps laid by the U.S.
for a while, but that can't last for ever.
David Brown, chief European economist at Bear Stearns in London, said that it's crunch time for the European Central Bank. "It needs to come down off the fence now," he
said.
"In 2001, the ECB followed its instincts on rates too late and promulgated two consecutive recessions in Germany in 2002 and 2004 as a result. It cannot afford to make
the same mistake now... The PMI services data have recession risk written all over them in southern Europe."
To recap, Tuesday's PMIs really did have a nasty edge. The index fell to its lowest level since July 2003, at 50.6, from a preliminary estimate of 52.0 and December's
53.1 reading.
Spain's data were particularly ugly. Its index now stands at 44.2 - far below the 50 threshold separating expansion and contraction and an all-time low for the index,
which dates back to 1999. If Spain had been excluded from the overall index, it would have reached 51.
But it wasn't, and as Spain accounts for about 12% of the euro zone, its obvious housing-led woes are difficult for the hawkish European Central Bank to ignore.
Even the German component dropped to 49.2 from 51.2, and the French and Italian readings softened too.
"The soft PMIs are likely to rattle some of the more dovish members of the ECB," said Stuart Bennett, a senior currencies strategist at French bank Calyon in London.
"If Trichet's comments following this Thursday's policy meeting reflect these fears, the chances of an ECB rate cut, despite the bank's hawkishness up to now, will have
increased."
Mix that in with an annual 2% drop in December's retail sales, on top of a 1.2% drop in November, and the pressure on the ECB builds.
"The market will be even less accepting of a hawkish ECB attitude in the light of these data, and downside pressure on the euro seems likely as a result," said Paul
Robson, a currencies strategist at Royal Bank of Scotland in London.
He suggested selling the euro against the yen, noting that it has already stumbled against the U.S., Australian and New Zealand dollars.
Few seriously think that the ECB is going to cut rates from 4% Thursday. It has sent out a consistently hawkish message on the need to fight inflation for months now.
That may mean that until a cut starts to look imminent, the euro will be wedged in a narrow range.
But the view that it will have to act sooner or later is clearly weighing on the euro. That's a little counterintuitive as the dollar has gained support of late on the
basis that U.S. interest rates have been falling hard and fast to support the economy, while the euro is suffering because euro-zone rates may have to fall too.
No matter - the market is in a euro-bearish mood, and unless ECB President Jean-Claude Trichet reveals a magic monetary solution to balance sliding growth with painful
inflation, that's unlikely to change.
In early European trading Wednesday, the euro was trading at $1.4646, unchanged from its level late Tuesday in New York, according to EBS. It was a little lower against
the yen, at Y155.93 from Y156.49.
The dollar was at Y106.47 from Y106.87, while the pound was little changed at $1.9623 from $1.9634.
Tuesday's purchasing managers' index showed that clouds are gathering over the region's growth prospects, batting the euro sharply lower. Grim retail sales data for
December certainly didn't help either.
Although the currency hasn't dropped below its range for the year, it looks like further gains for the euro from here will be tough.
Gilles Moec, a European economist at Bank of America in London, noted that with the services PMIs so closely linked to consumer spending, this disappointing set of data
is particularly unsettling.
"(The) reading may come as a call to reason," he said in a note to clients. Sure, he said, the euro zone may be able to dodge the economic booby traps laid by the U.S.
for a while, but that can't last for ever.
David Brown, chief European economist at Bear Stearns in London, said that it's crunch time for the European Central Bank. "It needs to come down off the fence now," he
said.
"In 2001, the ECB followed its instincts on rates too late and promulgated two consecutive recessions in Germany in 2002 and 2004 as a result. It cannot afford to make
the same mistake now... The PMI services data have recession risk written all over them in southern Europe."
To recap, Tuesday's PMIs really did have a nasty edge. The index fell to its lowest level since July 2003, at 50.6, from a preliminary estimate of 52.0 and December's
53.1 reading.
Spain's data were particularly ugly. Its index now stands at 44.2 - far below the 50 threshold separating expansion and contraction and an all-time low for the index,
which dates back to 1999. If Spain had been excluded from the overall index, it would have reached 51.
But it wasn't, and as Spain accounts for about 12% of the euro zone, its obvious housing-led woes are difficult for the hawkish European Central Bank to ignore.
Even the German component dropped to 49.2 from 51.2, and the French and Italian readings softened too.
"The soft PMIs are likely to rattle some of the more dovish members of the ECB," said Stuart Bennett, a senior currencies strategist at French bank Calyon in London.
"If Trichet's comments following this Thursday's policy meeting reflect these fears, the chances of an ECB rate cut, despite the bank's hawkishness up to now, will have
increased."
Mix that in with an annual 2% drop in December's retail sales, on top of a 1.2% drop in November, and the pressure on the ECB builds.
"The market will be even less accepting of a hawkish ECB attitude in the light of these data, and downside pressure on the euro seems likely as a result," said Paul
Robson, a currencies strategist at Royal Bank of Scotland in London.
He suggested selling the euro against the yen, noting that it has already stumbled against the U.S., Australian and New Zealand dollars.
Few seriously think that the ECB is going to cut rates from 4% Thursday. It has sent out a consistently hawkish message on the need to fight inflation for months now.
That may mean that until a cut starts to look imminent, the euro will be wedged in a narrow range.
But the view that it will have to act sooner or later is clearly weighing on the euro. That's a little counterintuitive as the dollar has gained support of late on the
basis that U.S. interest rates have been falling hard and fast to support the economy, while the euro is suffering because euro-zone rates may have to fall too.
No matter - the market is in a euro-bearish mood, and unless ECB President Jean-Claude Trichet reveals a magic monetary solution to balance sliding growth with painful
inflation, that's unlikely to change.
In early European trading Wednesday, the euro was trading at $1.4646, unchanged from its level late Tuesday in New York, according to EBS. It was a little lower against
the yen, at Y155.93 from Y156.49.
The dollar was at Y106.47 from Y106.87, while the pound was little changed at $1.9623 from $1.9634.
7 February | 
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