Euro-Zone Economic Contraction Set to Ease (Euro Open)

The growth rate of the Euro-Zone economy will be highly watched tomorrow and is likely to shake markets if the published number deviates from expectations. Contractionary conditions might not actually be as bad as originally thought after Spain, the country with the worst jobless rate, had to revise its unemployment rate down.

[U][B]Key Overnight Developments[/B][/U]

[B]• Australian Inflation Expectations Highest Since October
• Moody’s Holds ‘Negative’ Outlook on N.Z. Banks
• Wages in Australia Grow at 4-Year High[/B]

[U][B]Critical Levels[/B][/U]

[B]Sterling[/B] price action against the[B] Dollar[/B] consolidated during Asian trading after having touched both our identified support and resistance levels. The [B]Euro[/B] played it similarly and even broke through pivot support for a brief moment before continuing up toward our ceiling at 1.4161, coming only 29 pips shy.

[B]Asia Session Highlights[/B][/U]

A [B]Moody’s[/B] research article continued to hold a [B]“negative” outlook for New Zealand’s banking system[/B]. “Impairment levels have risen noticeably so far in fiscal 2009…thereby reducing net profit growth and internal capital generation capabilities” said Marina Ip, assistant vice president at Moody’s Australia. The unwanted news comes just four weeks after Fitch, another major ratings agency, slashed New Zealand’s sovereign debt-rating outlook to “negative.” In that report, the agency cited the high level of dependence that the country has on short-term financing from abroad as reason for the caution. The credit outlook for both the public and private sectors in New Zealand remains weak. Yields are likely to remain high. On Monday, the country’s 10-year government bond yield rose to the highest level since the end of June. Such tight-money conditions might make it tough for the country to grow organically.

Australians [B]expect the highest level of inflation[/B] since October, after gasoline rose to $1.50 per liter, or $6.40 per gallon and [B]average weekly wages[/B] grew at the greatest pace since August 2005. Although it is true that an upward trend in the rate of wage growth may lead to a general rise in consumer prices, the anticipated 3.5% inflation rate might not necessarily become a realized threat. The 6.1% growth in pay through May substantially overshot forecasts, which called for figure to rise by only 5.3%. On one hand, this startling trend may induce wage-led inflation. On the other, it may not. The data does not include the wages of part-time workers. Keep in mind that since last summer, the number of full-time positions that were lost was replaced by almost the same amount of part-time ones created. This means that since the data only represents those who are working complete shifts it does not get weighed down by the downward wage pressure generally thrust upon part-timers. But the public does have some reason to believe the price of living will jump ahead. At its latest meeting, the RBA revised its growth forecast for 2009 significantly upward. The bank actually believes that their economy will expand by 0.5% - quite a stark difference from the 1.0% contraction which they had originally anticipated. It will be a tough call to predict. But in the mean time wages of all workers might continue to slow in gains, easing the pressure on overall inflation.

[U][B]Euro Session: What to Expect[/B][/U]

The [B]economies[/B] of [B]Germany[/B], France and, more importantly, the [B]Euro-Zone[/B] are expected to have [B]continued shrinking[/B] during the second quarter of 2009. Contraction rates for each area are, however, clearly expected to fair better than the period prior. Such optimism may be coming on the back of a lagged monetary transmission system, which saw the European Central Bank slash it’s overnight policy rate by 2.75 percentage points in the six months leading up to March and another half-point in May. The ECB also took unprecedented action last month when it injected 442.2 billion Euros into the zone’s banking system. These stimulative efforts, aimed at kickstarting the economy or at least at easing the pain, may have done just that – at least in the final part of the period. June saw the Euro-Zone unemployment rate actually come in 0.3 percentage points under expectations to 9.4% and the May figure revised down 0.2 percentage points to 9.2%. Much of this June error came after Spain, the Euro-Zone country with the largest amount of job losses in the last year, revised their rate of unemployment downward. Some of this liquidity easing must be trickling down if even the country with the weakest labor market finds itself doing better than initially expected. While the joblessness situation does seem to be softening, the Euro-Zone economy probably continued to decline – but only at a slower pace than many may be expecting, it may seem.

Switzerland’s [B]June Producer and Import Prices[/B] are expected top have risen by the largest monthly amount since July 2008. With the trade-weighted Franc exchange rate in May falling by the largest percentage amount since January, it may come to be that the country’s import prices will be reflected by such deterioration in the Swiss purchasing power abroad. On the contrary, trade data for June showed that the nominal value of imports rose by 2.5% while the real value rose even more, by 3.8%. In any case where the real value of a price variable exceeds that of the nominal one it is because the cost declined.

[B]Related Article:[/B]
EUR/USD: Trading the Euro-Zone GDP

[I]To reach the author regarding this article or subscribe to his email distribution list, please contact him at <[email protected]>[/I]