Today, the focus remains on Europe with the ECB meeting the main event for markets. Also interesting will be the preliminary estimate of euro zone Q1 GDP (first details) and in Germany the industrial production data. The Fed will publish its Beige Book and Germany and Portugal will tap the market.
The first estimate of euro zone Q1 GDP surprised on the upside of expectations as the euro zone economy (unexpectedly) stayed out of a (technical) recession.
According to the first reading, euro area economy stabilized in the first three months of the year while a second consecutive quarterly contraction was expected. The second reading is forecasted to confirm this outcome and we have no reasons to distance ourselves from the consensus. More interesting will be the details (new info). We expect that the positive surprise was based in private consumption and net exports, while gross fixed capital formation was probably a serious drag on growth. In Germany, production is forecast to have dropped again after a sharp 2.8% M/M increase in March. The March data were boosted by a strong rebound in construction, due to the unusually warm weather, but also excluding construction, production was strong in March. For April, the consensus is looking for a 1.0% M/M decline, but we believe that a stronger correction is likely, due to less favorable weather and the weakening global climate.
At this months’ ECB policy meeting, the governors will discuss two issues and provide answers to two questions. First, will they cut official interest rates? This will mainly depend on the outlook for inflation and economic growth. We think the answer here could be ‘yes’. Second, will they take extra ‘unconventional’ measures to ease the stress in especially the Spanish sovereign bond market?
We think the answer here will be ‘no’. Putting all elements together, we think that by cutting interest rates because of weaker growth and lower inflation, the ECB can demonstrate it continues to act within its mandate. The ECB of Trichet might have used the June meeting to prepare for a cut in July, but the Dragh-led ECB acted pro-actively in November and December of last year, cutting rates as its forward-looking assessment showed such action was appropriate Therefore, we see no reason why it shouldn’t do the same on Wednesday. Such a decision would also clearly separate standard and nonconventional policy actions, a signal the ECB will be happy to send. On top of this, the ECB will keep the door open for further non-conventional measures to help ease market stress, but only on the condition that EU political leaders first do their part of the job.
Overnight, Die Welt ran an article citing unidentified sources that Europe considers offering Spain a precautionary EFSF credit line to shore up its ailing banking sector. Spain could apply even before the Greek election. Such a credit line would allow the country to try to fund the recapitalization on its own with EFSF funds as a back-up facility if that wouldn’t succeed. For Spain, the advantage is that the precautionary credit has little conditions attached. Until now, Spain refused to ask for a bail-out