Manufacturing output in the Euro area has plunged…which may prompt earlier ECB action than anticipated
“The past few weeks has seen an increase in market appetite for risk. This is most clearly evident in the equity market with the S&P index rising by 18% from a new cycle low in early March, a performance broadly matched by the major European indices and the ISEQ index. Spreads on sovereign debt within the euro area have also narrowed, and the perceived risk of buying Irish and other peripheral euro zone bonds has fallen – the cost of insuring against an Irish debt default over the next five years, for example, has declined to 2.5% from a recent high of 3.8%. Commodity markets, too, have generally rallied, and crude oil looks as if it may have bottomed”, according to Bank of Ireland’s March Bulletin which was published today, Monday 30 March 2009.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “This change in market sentiment has impacted the dollar which in many ways is now the bell weather for risk aversion – the US currency benefited from the bear market on equities in the first two months of the year, and hence has suffered as a result of the recent rally.
“Yet the market’s enthusiasm that the worst of the global recession may be over sits uneasily with the view of policy-makers, which in general appears to have shifted to a more bearish stance, and some of the most recent data, which has been truly dismal. Take industrial production; German output fell an extraordinary 19.3% in the twelve months to January, while Japan recorded a plunge of 31%. These figures imply that global GDP is likely to have recorded another sharp fall in the first quarter of the year, following a substantial contraction in the fourth quarter of 2008, a prospect which has prompted many forecasters to revise down growth projections for 2009 as a whole. This is particularly true for official forecasters, and agencies such as the World Bank.
“Industrial production in the euro zone as a whole also fell sharply in January, to a level over 6% below the fourth quarter average, and some ECB council members have emphasised the downside risks to the Bank’s most recent forecast, published early in March. This concern and the low inflation backdrop may also prompt the ECB to bring forward any further monetary easing, and we now expect the Bank to cut the repo rate to 1% at its April 2 meeting, rather than wait until May, particularly as it coincides with the G20 meeting in London, where the emphasis will be on global policy action to kick-start credit growth and economic activity.
“The Euro area followed the US into recession and may well lag in the recovery, which is ultimately positive for the dollar against the single currency. Consequently we feel that the current relationship between the US currency and equity markets will fade, and that the dollar will benefit from any clearer signs that the American economy is beginning to show some signs of life”, concluded Dr. Dan McLaughlin.
30 March 2009
Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221
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Group Corporate Communications
Bank of Ireland
Tel: 01 604 3836 / 087 246 0358