Intelligentguess

The US Dollar gets into a free fall against most other assets after a Chinese official hints at diversifying deployment of reserves into stronger currencies

• The Euro sped past 1.47. It appears it’s only a matter of time we see 1.50
• Crude nudges $100 per barrel. Still a little short of it but not much
• Gold goes past $845 /oz and is within reach of an all time high of $850 / oz

I could go on and on….

Amidst all this we see some evidence of decoupling

The Australian Central Bank raised interest rates today. The ECB is expected to maintain a hawkish stance on monetary policy
Amidst all this the Reserve Bank of India has announced that it has loaded up on more ammunition to defend the Indian Rupee against the deluge of dollar flows. The ceiling for issuance of Market Stabilisation (or MSS) bonds has been raised to INR 2.5 trn. That’s almost two times the gross yearly government borrowing (in other words the fiscal deficit).

It’s time they realise that such measures only add to the flows, emboldening potential investors of the near surety that the currency would not depreciate. In addition it allows them to test the limits of the abilities of the central bankers in managing these flows.

It’s time RBI realises that these measures are an exercise in futility.

Remember the “Impossible Trinity“.

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The ECB at at today’s meeting decided to leave the key ECB interest rates unchanged at 4.00%. The ECB stated that Monetary policy is still on the accommodative side

The ECB’s percepective on its future expectations is explained below:

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Economic Activity

• Economic activity in the euro area in the second quarter of 2007 continued to expand in line with the ECB’s baseline scenario.
• The medium-term outlook for economic activity remains favourable.
• The strong rate of monetary and credit expansion reflects, in part, favourable financing conditions and solid economic growth.

The risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term. At medium to longer horizons, the balance of risks remains on the downside.

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Price Stability

• The short-term profile of annual inflation rates continues to be determined largely by current and past energy price developments.
• The medium-term outlook for price stability remains subject to upside risks.
• Annual inflation rates are likely to fall only slightly in the months ahead before rising again significantly towards the end of the year.

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Capacity Utilisation

Capacity utilisation is high and labour markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage and profit margin developments.

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Monetary expansion

• There are indications that higher short-term interest rates are now influencing monetary dynamics, although they have not, as yet, significantly dampened the overall strength of the underlying rate of monetary and credit expansion.
• The underlying rate of monetary expansion remains strong.

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Given the vigorous monetary and credit growth in an environment of already ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium to longer term.

The next Monetary Policy decision is due on August 2nd 2007

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Situation

• On a monthly basis Producer prices rose by 0.34% (0.43% in Apr’07)
• On an annual basis Producer prices rose by 2.36% p.a ( 2.37% p.a in Apr’07)

Background

1. Oil prices have risen by 6.29% on an average in Jun’07 (over May’07). This cause Core CPI ( ex Energy) to start rising.
2. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. The ECB in its meeting on Jun’07 further raised the bank rate by 0.25 basis points to 4.00%.
3. European GDP has been expanding in Q1 2007
4. The ECB has a monetary Policy meeting on July 5th 2007

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(click on image for a better visual)

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Conclusion

• A slight rise in PPI towards 2.50% p.a towards Sept’07 can be expected thanks to the rise in energy  prices in recent times.
• The effect of the rate hikes should push PPI down to the ECB target areas of 2.00% p.a to 1.50% p.a post Sept’07

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Related links

• USA - Inflation (specially core) faces a rising risk
• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04
• Japan - Producer prices rise in Apr’07

• Europe - Inflation down in May’07, but rising energy prices can change this picture
• UK : Inflation ( CPI and PPI ) drops in May’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

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Situation

• On a monthly basis Consumer prices rose by 0.24 % (0.63 % in Apr’07)
• On an annual basis Consumer prices rose by  1.87 % p.a ( 1.91% p.a in Apr’07)
• On an monthly basis Core Consumer prices - EFAT ( Ex Energy, Food , Alchohol and Tobbaco ) rose by  0.17 % p.a ( 0.53 % p.a in Apr’07)
• On an annual basis Core Consumer prices ( EFAT) rose by  1.94% p.a ( 1.90 % p.a in Apr’07)

Background

1. Oil prices have risen by 6.29% on an average in Jun’07 (over May’07). This cause Core CPI ( ex Energy) to start rising.
2. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. The ECB in its meeting on Jun’07 further raised the bank rate by 0.25 bais points to 4.00%.
3. European GDP has been expanding in Q1 2007
4. The ECB has a monetary Policy meeting on July 5th 2007

6. Core Consumer Prices ( EFAT and ex- Energy ) viz bank rate ( click on image for a better Visual)

While CPI ( ex- EFAT) has been dropping on the interest rate hikes , CPI ( ex- Energy) remains on a rising trend.

i.e it is the drop in energy prices that has assisted the drop in ex-EFAT

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7. CPI viz PPI (click on image for a better Visual)

Producer prices ( PPI) remains in a downward trend - and could indicate that CPI may not rise much further in the immediate future

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Conclusion

Core CPI - EFAT has been dropping mainly due to drop in energy prices in the early part of the year

It can be expected that the recent rise in energy prices will cause CPI (EFAT)  to start rising and thereby have an effect on CPI ( ex- Energy) to rise further

This will be a major concern in the ECB - Monetary Policy meeting on July 5th 2007. The currency market has discounted a possibbility of a hike already ( Euro risen from 1.33 to 1.36 to the US $)

In the longer term the ECB is getting closer to pausing as its eight interest rate hikes since 2005 start to weigh on the euro zone growth.

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Related links

• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• UK : Inflation ( CPI and PPI ) drops in May’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07
• India - marginal drop in inflation ( CPI )

• USA - Inflation (specially core) faces a rising risk
• Europe - Producer Prices in Apr’07 rise at its slowest pace since Jul’04
• Japan - Producer prices rise in Apr’07

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Situation

• On a monthly basis production contracted by -0.45%  ( grew by 2.85% in Mar’07)
• On a yearly basis production has grown by 9.03% p.a ( grew by 10.17 % p.a in Mar’07)

Background

• Production has been on a downward growth trend since May’06 ( 5.64% p.a in May’06 and 3.06% p.a now)
• The ECB raised interest rates to 4.00% on June 6 2007

Conclusion  (click on image for a better visual)

• Orders likely to drop initially towards 4.5.% p.a and then retain a range between 4.50% p.a - 9.50% p.a towards Sept’07
• Growth then likely to drop to a 0% p.a after Sept ‘07 towards Mid ‘08

Related links

• Europe - New Orders grow in Mar’07
• USA - New orders grow for the first time since Sept’06
• Japan - Orders grow marginally in Apr’07
• UK - New Orders decline in Apr’07

• Europe - Production in Apr’07
• USA - Production in May’07 grows at its slowest pace since Sept’05
• UK - Production remains down in Apr’07
• Japan - Production grows at a declining rate in Apr’07
• India - IIP continues to grow in Apr’07

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Situation

• On a monthly basis prices rose by 0.43 % (0.32 % in Mar’07)
• On an annual basis prices rose by  2.41 % p.a ( 2.82 % p.a in Mar’07)

Background

1. The annual inflation is at its lowest levels since July 2004 ( 2.41 % p.a)
2. The European Commercial Bank (ECB) had raised its interest rates from 3.25% to 3.75%,  in Dec’06 (25 basis ponts), and in Marc’07 (25 basis points).
3. The ECB in its meeting on Jun’07 further raised the bank rate by 0.25 bais points to 4.00%.
4. The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term.
5. European GDP has been expanding in Q1 2007

Conclusion (click on image for a better visual)

• The recent hike in rates would encourage the PPI to move towards the  2.00% p.a area ( ECB target)
• The strong drop in PPI could also lead to CPI ( specifically Core CPI) dropping. If this does happen - the ECB could take a breather on rate hikes.

Related links

• Europe - Producer Prices : Prices in Mar’07 rise at the lowest pace since Jul’04
• USA - Producers prices remain high in Apr ‘07
• UK - PPI Producer prices drop in Apr’07
• Japan - Producer prices rise in Apr’07

• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• USA - Inflation rate (CPI) drops marginally in Apr’07
• UK Inflation (CPI) drops in Apr’07
• Japan - Inflation indices ( CPI ) deflate in Mar’07 
• India - marginal drop in inflation ( CPI )

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Goods as a % of GDP

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Goods and Services as a % of GDP

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Balance of payments ( BOP) as a % of GDP

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UK - Trade as a % of GDP (click on image for a larger visual)

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USA - Trade as a % of GDP (click on image for a larger visual)

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Situation

• On a monthly basis production contracted by -0.83%  ( grew by 0.54% in Mar’07)
• On a yearly basis production has grown by 3.06 % p.a ( grew by 3.95 % p.a in Mar’07)

Background

• Production has been on a downward trend since May’06 ( 5.64% p.a)
• The ECB raised interest rates to 4.00% on June 6 2007

Conclusion ( click on image for a better visual) 

• Production looks like dropping to a maximum of a 2.4% p.a area, and then rising towards 5% p.a towards Sept ‘07.
• Post Sept’07 growth looks like dropping to a 0% p.a towards mid ‘08

Related links

• Euro area - Production (IIP) grows in Feb’07
• UK - Production remains down in Apr’07
• Japan - Production grows at a declining rate in Apr’07
• USA - Production grows in Mar’07 at the slowest pace since Sept’05
• India - IIP continues to grow in Apr’07

• USA - New orders grow for the first time since Sept’06
• Europe - New Orders grow in Mar’07
• Japan - Orders grow marginally in Apr’07

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Situation

• On a quarterly basis GDP grew by 0.92%  ( was 0.89% in Q4 2006)
• On an annual basis GDP grew by 3.42% p.a in Q1 2007 ( was 3.33% p.a in Q4 2006)

Background

• Europe - New Orders grow in Mar’07
• Euro area - Production growth sustained in Mar’07
• Euro area - Core inflation ( CPI ) growth at its highest since Jun’04
• Interest rates have been raised in Dec’06 towards 3.5% and in Mar’07 towards 3.75%.
• Members of the ECB have said that interest rates would again be be increased in Jun’07

Crosshair

GDP - Annual growth rate 

Conclusion ( click on images for a better visual)

• Can expect a GDP growth range of 3% to 4% for Q2 2007
• Growth should start dropping from Q4 2007 to a 1.50% area p.a towards mid 2008

Related links

• Euro area GDP - Up by 3.28 percent per annum in Q4 2006 ( 2.73 percent per annum in Q3 2006) USA - Q1 2007 GDP annual growth slumps to its lowest since 2003 Q3
• UK - GDP grew at 2.96 percent per annum in Q4 2006 as compared to 2.90 percent in Q3 2006
• Japan - GDP growth stronger in Q4 2006
• India - GDP growth at 8.64 percent p.a for Q4, October - December 2006

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Situation

• On a monthly basis orders grew by 2.90%   ( -0.59 % drop in Feb’07)
• On a yearly basis orders grew by 10.21 % p.a ( 5.94% p.a growth in Feb’07)

Background

• Interest rates have been raised in Dec’06 towards 3.5% and in Mar’07 towards 3.75%.
• Members of the ECB have said that interest rates would again be be increased in Jun’07
• Orders have been declining since the interest rate hike in Dec’06

Conclusion

1. The orders growth can be expected to range between 4.5 % p.a to 9.5 % p.a initially ( Mid ‘07 )
2. Post this - growth looks like droping to a “0% ” after Mid ‘07 towards mid ‘08

Related links

• Europe - New Orders growth rate drops in Feb 2007
• USA - New Orders declines in Mar’07
• Japan - Dramatic fall in new orders in Mar’07 ( strongest fall since May ‘02 )

• Euro area - Production (IIP) grows in Feb’07
• Japan - Production growth rate drops in Mar’07
• USA - Production grows in Mar’07 at the slowest pace since Sept’05
• UK - Production - annual growth rate slips to a negative in Mar’07
• India - Production grows in Mar’07

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