Resolution of the Greek crisis did not take a definitive step forward with the finance ministers meeting in Riga. The controversial move to secure cash reserves from local governments buys Greece several weeks, but the ECB appears increasingly uncomfortable with its rising ELA exposure to Greece. At the same time, Alexis Tsipras’ popularity is starting to wane. The clock is ticking. Our baseline remains unchanged but the risks are high and rising.
Keep an eye on Italy over the next two weeks – the country faces a relatively low risk of a high impact event. The final vote on the new electoral law in the Lower House is a key fork in the road for PM Renzi’s institutional reform process and probably for the future of his government. We think that the balance of probability is largely in favour of PM Renzi and that the electoral law should pass. The risks are not negligible, however.
Finland’s Centre Party will lead the formation of the new government. A coalition of three parties is probably required to facilitate a coherent reform agenda, which could include the EU-skeptical Finns party. We would downplay the risks to Greece as the Finns party has toned down its rhetoric and is keen to join the government. At worst, Finland could be a source of delay.
?The April Flash PMIs disappointed with the euro area composite falling 0.5 points to 53.5 (market expectation: 54.4). Both France and Germany missed expectations by a non-negligible margin. However, the euro composite remained above Q1 levels and is consistent with GDP growth slowing only marginally from 0.5% qoq in Q1 to 0.4% in Q2, in line with our expectations. Other euro area data surprised to the downside too and SIREN-Surprise fell into negative territory for the first time in four months. Nevertheless, SIRENMomentum appears to confirm upside risk relative to our (1.4% yoy) and Bloomberg consensus projections (1.4% yoy) for 2015.
Next week sees the first April CPI prints in the euro area. The risks are to the downside of consensus. We see scope for inflation to rise in H2. There is evidence of the weaker currency in imported inflation, but we don’t expect the impact on producer and consumer prices to be evident until H2.
Here is a link to the full report.
The ECB has taken on a great deal of additional responsibility in the last decade but its one core mandate is to target an inflation rate of close to but below 2%. Inflation figures can’t but surprise to the downside considering the decline in energy prices and the knock-on effects this has for prices of other goods. However we also know that these factors will wash out of the statistics within six months. At that point the likelihood of deflationary pressures easing, not least because the ECB has reversed monetary policy, will improve.
There is not a great deal of evidence to suggest QE supports economic growth. On the other hand we have ample evidence to support the view that it inflates asset prices and puts downward pressure on the respective currency.
The Euro fell from $1.40 in May 2014 to a low near $1.05 before losing momentum in March. It retested the low early this month and has now rebounded to challenge the $1.10 level. The Euro has reached a low of at least near-term significance and the most likely scenario is that we can expect additional mean reversion.
By the same token, the Euro Stoxx Index lost momentum following a rally from 300 to almost 400 since January. Consolidation of that gain has so far been limited to a reasonably tight range but it would be rash to rule out the possibility of a swifter process of mean reversion, particularly if the Euro continues to strengthen.