European Economic Data Preview 06.12.2009

The economic calendar looks fairly uneventful in European hours, with most of the outcomes of most releases reflecting themes that have already been priced into exchange rates. On the inflation front, Germany’s [B]Wholesale Price Index[/B] is set to shrink -9.0% in the year to May, the largest decline on record; meanwhile, France’s [B]Consumer Price Index[/B] is set to dip into negative territory with a print at -0.2% for the annualized metric. German and Italian consumer inflation also turned weaker, with the former coming to a standstill and the latter dropping to a record-low 0.8% in the year to May. Such outcomes hammer home the fact that the Euro Zone now faces a credible deflationary threat, arguing for a far more forceful monetary response than anything that has been introduced by the European Central Bank thus far. Overnight index swaps suggest that traders are pricing in virtually no chance that the ECB will lower rates at the next policy meeting and quantitative easing will be difficult to expand beyond the modest measures announced earlier this month given the internal conflict about such policies within the central bank. On balance, the currency bloc is looking increasingly vulnerable to slipping into prolonged stagnation as entrenched expectations of lower prices see consumers and businesses hold off on spending and investment as they perpetually wait for the best possible bargain.