Europe is on the mend. Fundamental analysis for 02.05.2014

GDP under snowdrifts

The biggest news this week was the growth of the U.S. economy in the first quarter, which amounted to a paltry 0.1% (despite the general expectation of a rise of 1.1%). Since statistics are provisional and some data was not included in the release, later they can be reviewed revealing a more positive outcome. The main reason for such weak GDP growth was unusually cold winter in the US.

However, despite such ambiguous data, the Fed during its meeting decided to reduce the amount of QE by another $ 10 billion, bringing the size of the program to $ 45 billion of monthly purchases of securities. The Fed emphasized that despite short-term setbacks, the American economy as a whole is on a road to recovery. However, the GDP growth forecast of 2.9% for the current year is already starting to create doubt.

An interesting detail is that if not the health care reform initiated by Barack Obama, we would now be looking a negative statistics. The fact is that since the beginning of the year there was a sharp increase in government spending on health care, which ultimately allowed the economy to stay afloat, offsetting the decline in exports by 7.6% (there were difficulties with loading due to snowdrifts) and falling investment by 5 7% due to delays in construction due to bad weather.

Meanwhile, in the second quarter, the U.S. economy may show rapid acceleration. The data released earlier by the Industrial PMI calculation ISM, after the February negative figure shows steady growth for three consecutive months. In addition there is an increase in consumer spending, and by an impressive 0.9%, which is the largest monthly gain in the past four years.

The labour market situation is not as ambiguous. The applications for unemployment benefits continue to increase for the third consecutive week. During the previous week, the rate has gone up to 344k, which was one of the highest values since the beginning of the year. However, according to ADP, in April, 220k jobs were created, which is the best result of the last three months. Official data will be published on Friday evening.

Europe is on the mend

In Europe at the beginning of Quarter II acceleration in the industrial sector was observed. On the other hand, for the second consecutive month the companies had to lower prices for their products, indicating low demand and the continuing risks of low inflation, despite the rise in the index at the end of April from 0.5% to 0.7%. It is noteworthy that the growth of pan-European PMI is not solely due to the success of the German economy.

The indicators of the industrial PMI in Italy and Spain are on the annual maximum, while in France the index slipped to 51.2 from 52.1. However, even with this reduction, the French economy will continue to grow, although more modestly. Additional positive news for the European “bulls” was the decline in unemployment in the euro area, to 11.8%. Furthermore, last month’s data was also revised for the better.

Meanwhile, in Spain and Greece, unemployment still passes the 25% mark, but in Austria and Germany it is around 5%. Moreover, the governments of troubled European countries themselves admit that in the coming years, unemployment will remain high. Therefore, the only source of growth is exports, which is in trouble because of the high-priced euro.

For example, the new Italian government has already sounded the alarm, calling on the Commission to grant the country a reprieve to achieve deficit reduction. The Finance Minister criticized the position of Brussels and the ECB, which, in his opinion, there is lot of talk, but few actions. The opinion in Rome is that the way to a balanced growth in the region is through higher inflation and a less expensive euro.

Moreover, the Italian government does not deny the need for deficit reduction, but offer to do it at a softer pace. The Brussels fears are well founded, because if the Italian government debt will again begin to swell, it could negatively affect investor sentiment. However, a new wave of spending cuts may damage the economy, which last time led to the growth of rates in the debt market.




I still keep buying the Eurodollar. The slight increase in inflation allows the ECB to refrain from any action at the next meeting. The reduction of QE by 10 billion from the Fed was taken rather calmly by the market, and therefore today's statistics on the U.S. labour market are unlikely to break the current upward trend. Moreover, if the data will come not as positive as is expected by the market, the maximum could be updated even before the close of trading on Friday.