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November 03, 2005
Central Bankers Worry, But The News Ain't So Bad
The European Central Bank rate hike watch continues. From the Financial Times:
Jean-Claude Trichet, European Central Bank president, made clear on Thursday that the ECB could increase interest rates “at any time” and that the bank might act pre-emptively to control eurozone inflation.
His hardline stance kept open the possibility of an ECB interest rate rise as early as next month, a move that would end more than two years in which the main interest rate has been left unchanged at 2 per cent.
However, Mr Trichet’s comments, after a rate- setting meeting of the ECB’s governing council in Frankfurt, fell short of signalling a rise next month, and many economists argued that the weakness of the eurozone growth made a rise early in 2006 more likely.
Financial markets attached a slightly lower probability to a December rise than before, but still expected at least a quarter percentage point rise by March.
The adjustment was due to the fact that the talk from the governing council prior to the meeting had been interpreted as pretty hawkish. (Reuters provides a nice review of what the ECB folks had been saying since the last meeting.) That is the pattern from central bankers these days. Also from the Financial Times:
US Treasury yields jumped on Thursday, pushed higher by a warning on inflation from Alan Greenspan, chairman of the Federal Reserve, and data showing robust services activity.
In his first Congressional testimony since June, Mr Greenspan warned “uncertainty” surrounded the inflation outlook, saying “global forces” that had subdued inflation and interest rates in spite of firm US economic growth would weaken.
Today the Institute for Supply Management said its services industry index was 60 in October, compared with 53.3 in September. A reading of 57 was expected, according to the median estimate of 60 economists surveyed by Bloomberg. Readings above 50 signify expansion. An ISM index on Nov. 1 showed manufacturing expanded last month at the second- fastest pace this year.
We also had some pre-holiday cheer from retail sales. From the Wall Street Journal:
Retail sales were lifted in October by a late snap of fall weather that freed some pent-up demand for seasonal merchandise, with discounters, teen apparel chains and luxury department stores continuing to lead the pack...
"Consumers are hanging in there, despite facing significant pressure on the their discretionary income," said Ken Perkins, president of Retail Metrics LLC, a research firm in Swampscott, Mass. He noted that 73% of the 53 retailers he tracks surpassed expectations; 25 missed expectations; and two retailers had results that matched estimates.
At the same time, the news on the inflation-pressure front was pretty darn good. From MarketWatch:
Productivity in the American workplace accelerated in the third quarter, rising at a 4.1% annual rate, the Labor Department estimated Thursday.
Unit labor costs - a key measure of inflationary pressures from compensation - fell 0.5% annualized, the biggest decline since the second quarter of last year. Read full survey.
When you add it all up, this assessment, from Mr. Trichet's comments today, might just as well be applied to the U.S. economy:
Trichet was somewhat more confident about growth, saying global demand would benefit euro area exports, and low interest rates would benefit investment demand.
"Although economic growth has been dampened by the marked increase in oil prices over recent quarters, it appears that the euro area economy has shown considerable resilience to this shock"...
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