It is becoming increasingly apparent that the European Central Bank may only be a hit a wonder this summer. Although ECB President Trichet warned that interest rates could be increased next month, slowing growth may prevent them from raising rates further than 4.25 percent.
Unlike the Federal Reserve, Eurozone interest rates are high because the ECB has not cut interest rates throughout the Fed’s easing cycle. As a result, there isn’t a significant amount of room to raise rates. On top of that, economic data from the Eurozone is taking a turn for the worse. Service and manufacturing PMI both dipped into contractionary territory, taking the composite PMI index for the Eurozone below 50, the lowest on record (Series started in 2005). This explains why there has also been a sharp drop in German business confidence. With the prospect of an interest rate hike, the country is no longer immune to the damaging economic impact of higher oil prices. Over the next 24 hours, we are looking forward to the German GfK consumer confidence numbers and French consumer spending – both pieces of data have greater downside than upside risks. Switzerland will also be releasing the UBS consumption index. Given the dovishness of the Swiss National Bank last week, consumption should be weak.