ECB: Still Keeping the Market Guessing

With less than 2 weeks to go before the next European Central Bank meeting, Trichet is still keeping the markets guessing.

Whose to blame him however since the ECB may not be sure about whether they want to raise interest rates either. The credit markets have stabilized slightly, but demand for 3 month loans hit a record high yesterday which means that banks are still seeking liquidity. Economic data has been mixed. Even though confidence among businesses and consumers are falling, retail PMI rose for the first time in 4 months as the German unemployment rate dipped to a 14 year low. The futures market is pricing in a 40 percent chance of an interest rate hike, but 70 percent of analysts polled expect rates to remain unchanged. We expect the ECB to leave rates unchanged, but remain hawkish to avoid triggering another dramatic move in the financial markets.