Is Europe Really Turning Japanese?

For quite some while the talk amongst many pundits and experts has been conerning the outlook for Europe. More exactly whether or not the Eurozone could suffer a similar fate to that which has aflicted the Japanese economy, not just forone, but two lost decades now- deflation.

There are structural similarities between Japan and the Eurozone that do make this a distinct possibility, but at the same time, there’s many others that don’t. However, a key factor in determining whether or not we will see the ‘Japanification’ of the Eurozone is likely to be the path of the exchange rate.

You see as much as Donald Trump would like the dollar toweaken substantially from here, its even more vital for Europe that it does not. If Europe is to avoid a Japanese style, multi-year deflationary spiral, it will need to maintian a weak Euro to achieve that. Leaving aside the North western European states, it’s the south of the region that is still the main headache for the ECB in this regard. However, what happens if Germany finds itself falling into a deep recession in the coming months?

Naturally, when one delves deeper into what is happening around the region, leaving aside the politics, its easy to understand why Brexit is potentially so toxic for Europe- much more toxic than many UK politicans realise I suspect. So, are the markets right to conern themselves with the propsect that Europe is in real danger of losing a decade or two?

Heck, yes they certainly are, and its all made much worse, on many fronts when a dogmatic, rules based system refuses to be pragmatic, ‘borders’ en all! Ultimately conformity will stifle the one thing that is surely Europe’s strength- its diversity. Anyway there’s much more to say on this whole subject than just a few lines here and for sure its something we will revisit many times in the coming weeks and months.

Meanwhile, despite some disappointment following a drop in US average wages in March, the dollar still ended last week on a firm footing with the US Index closing at 97.38. The reason for that was surely down to a good beat on the number of jobs created which offset the wages data.  Consequently, the EURUSD didn’t break any fresh ground and remained for the whole week, inside that 1.1200-1.1250 range I noted- hardly an exciting end to the week there I’m afraid.

The pound did recover from an intraday low of 1.2987 versus the dollar to later close at 1.3038, but that was still well down on the week. It has bounced a little this morning, back above 1.3050 as the GBPEUR lifts back above 1.1625, but of coursethe currency is still entirely hostage to what develops over the next few days.

The economic release agenda this week is highlighted by the ECB monetary policy decision. Normally this event takes place on a Thursday, but this month it’s a day early, on Wednesday. Anyway, no changes are expected from the ECBthis week and so, as is often the case, the markets may have to wait to see what the ECB boss has to say a little later on when he chairs the usual 1.30pm press debrief. This event will clash with the release of the latest US Consumer Price index report which might make for some interesting price action around that time.

Beyond that, the calls are mounting for the ECB to adopt a more pragmatic approach to its monetary policy with a tiered system. That would indeed be a giant step were it ever to come about. However, its one thing calling for it, but anotherthing ever realising it. What is abundantly clear though; is that Europe needs to change, not just in this respect, but in many many other areas too. Sadly, bureaucracy and democracy will always be diametrically opposed to each other and there’s no better example of that unfolding here right now!

Important Economic Releases Due this week

09/04- 11.00am US NFIB Small Business Optimism Index

10/04- 9.30am UK February Industrial and Manufacturing Production

10/04- 12.45pm ECB Monetary Policy Decision

            (No change to any of the current benchmark rates expected)

10/04- 1.30pm ECB Post Policy Decision Press Conference

10/04- 1.30pm US March CPI Report

11/04- 1.30am Chinese March CPI Report

12/04- 3.00pm US University of Michigan April Consumer Confidence Index