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WEEK IN FOCUS: 22/08/11 - 26/08/11

 

 

Fight fire with fire…

 

Disappointing set of macroeconomic data and a deteriorating outlook for the global economy has prompted many to question whether another round of Quantitative Easing (QE) is a matter of when and not if. However, even though market participants continue to demand more easing from the Fed, the attention will likely turn back to the ECB which continues to preach price stability at the time when speculators are increasing their bets that the Eurozone experiment will soon come to an end.

 

The recent release of less than impressive advanced GDP reports in Eurozone raised questions about the ability of the core states and in particular Germany to act as a so called locomotive for the region. More importantly, it is this sharper than expected slowdown in the core states that has put additional pressure on the ECB to act as a backstop and prevent another speculative attack on the peripheral Eurozone by resuming its controversial bond buying program. In addition to that, the rising risk of contagion in the core region caused several states, including the Italian, Spanish and French governments to commit to additional austerity measures in order to regain market confidence. As a result it remains to be seen whether the Eurozone can survive the age of austerity without an introduction of Eurobonds, which many analysts believe would reduce incentives for troubled countries to tackle budget deficits and instead rely on the fiscal strength of the core states. Finally, the absence of further monetary policy easing may even lead to a shortfall in growth which in turn will require further fiscal tightening to meet the budget targets. However, by doing so, central bankers and the respective lawmakers will only undermine the economic recovery and push the economies back into a recession.

 

Déjà vu…

 

There is a growing sense of deja vu that just like last year, the upcoming Jackson Hole symposium will be used by the governor of the Federal Reserve to prepare investors for another round of monetary policy easing. The recent sell off in equity markets raised concerns that investors are turning increasingly bearish on the economic outlook and that many foresee an outright recession.

 

However, there is a risk that further easing by the Fed alone will do little to stimulate the global economic recovery and that a similar action will be required by the ECB. It is unlikely that the ECB will reverse interest rate hikes as it may be perceived that the initial decision to raise the benchmark borrowing rate was a policy error. As such, the central bank will have to find another way to prevent credit markets from ceasing.

 

Finally…

 

In terms of macroeconomic data releases, in Europe attention will be firmly on the PMI releases as well as the latest ZEW and IFO surveys. Across the pond in the US, traders will get to digest the release of the GDP report, which is expected to be revised down to around 1.1% compared to the initial 1.3% reading.