Looks like a demand leakage if it goes through:

Highlights:

 
 
Article snip:

German Net Pay May Shrink on Social Insurance Changes, FAZ Says (Bloomberg) - Germany’s top wage earners may take home less pay next year because a larger portion of their wage may be subjected to social insurance contributions, the Frankfurter Allgemeine Zeitung said on its Internet site. A pension insurance panel has suggested in its regular annual review to raise the amount of gross monthly pay on which contributions have to be paid by 100 euros ($152) to 5,400 euros in western Germany and by 50 euros to 4,550 euros in the eastern half of the country, the newspaper said. Employees whose pay is above these thresholds will pay an extra 11.60 euros per month into pension and unemployment insurance coffers from the start of next year, the newspaper said. The panel’s proposals are generally approved, it said. Thresholds for health and nursing insurance contributions will also be raised, the FAZ said, without providing figures.

[Skip to the end]

Weakness and inflation= rate hikes in the eurozone.

Fed response to same conditions later today.

[top]

[Skip to the end]

Weakness, inflation, and rising debt to GDP levels caused by both weakness and higher interest rates.

Get your sovereign eurozone credit default insurance before it’s too late!

Highlights

[top]

[Skip to the end]

Highlights

Euro Central bankers think that’s a good thing for their fight against inflation. Unemployment was getting far too low for comfort.

More than enough to warrant rate hikes.

Trying to add supply to labor markets to keep wages ‘well contained.’

Spain had been growing too fast for comfort for the inflation hawks

[top]

[Skip to the end]

Highlights

Doesn’t mean they won’t do it.

If inflation expectations remain elevated.

[top]

[Skip to the end]

All supportive of rate hikes today, and the Fed’s notion that they would cut because the US was ’stealing demand’ via US exports is falling by the wayside.

For Central Bankers, inflation expectations are an absolute determinant.

[top]

[Skip to the end]

Highlights:

Scary low rate for the ECB.

Fuel for the hawks, Germany’s unemployment is too low for them as well.

For sure. And there will be discussion of hikes.

The ECB wants this kind of slack, but still not enough for them.

Yes, as they sure aren’t going to cut as Bernanke originally hoped.

They never bit on his bait to start an international race to the bottom with rate cuts/inflation.

The Fed thought the rising euro and the loss of demand to the US, as US exports rose, would cause the ECB to blink and cut rates.

Instead, the falling dollar and ripping US inflation has caused the Fed to start talking about hikes.

In the mainstream paradigm, the ECB was right in not cutting while the Fed is coming under fire for cutting aggressively into a triple negative supply shock, letting inflation expectations start to elevate, and risking a much larger slowdown bringing inflation down from much higher levels.

[top]

[Skip to the end]

Highlights

Note the concern over inflation expectations in the text below.
That’s what has turned the Fed as well.

While the US economic memory from the depression is unemployment lines, the German memory is wheelbarrows full of money.

Eurozone unemployment is down to about 7% which frightens the inflation hawks, as per the below reports.

[top][end]

Articles

European Inflation Accelerates More Than Forecast as Oil Surges

(Bloomberg) European inflation accelerated faster than economists forecast this month as oil prices jumped to a record, adding to what European Central Bank President Jean-Claude Trichet has called policy makers’ “biggest challenge.”

The inflation rate in the euro area rose to 3.6 percent, matching a 16-year high, from 3.3 percent in April, the European Union statistics office in Luxembourg said in a statement today.

Economists had forecast a 3.5 percent rate, according to the median of 36 estimates in a Bloomberg survey.

The ECB, which aims to keep consumer-price growth below 2 percent, said yesterday there are signs inflation expectations “have been trending up recently” and it’s imperative that they remain contained. The Frankfurt-based bank celebrates its 10th anniversary this weekend, having failed to meet its target for the last eight years.

“There has been a sharp deterioration in the inflation picture,” said Simon Barry, an economist at Ulster Bank in Dublin. “Our base case is the ECB is on hold for now, but the inflation risk has increased and there’s no room for complacency.”

Separate figures published by the statistics office today show that unemployment in the euro area remained at a record low 7.1 percent in April.

Crude Oil
Crude oil prices have doubled in the last 12 months and reached a record $135.09 May 22. Food commodities have also surged in the last year, boosting how much consumers are paying for staples such as bread and milk. Wheat has gained 45 percent in the past year and corn has surged 51 percent.

Soaring prices have led to protests in Europe and companies and consumers expect prices to continue to rise. A European Commission index of manufacturers’ selling price expectations increased this month, while consumers’ outlook for their personal finances deteriorated. Greencore Group Plc, the world’s biggest maker of prepared sandwiches, this week said it’s been passing on cost increases to customers by raising its prices.

In France, fishermen have blockaded ports in the past week to protest against the increase in oil prices, while a group representing bus companies in Ireland said it may have to stop school runs because of the cost of gasoline.

Key Rate
The ECB has kept its key rate at a six-year high of 4 percent to counter inflation even as the economy of the 15 euro nations cools. The central bank is concerned that wages will increase to compensate for the higher cost of living, threatening a wage-price spiral.

“We’re looking at below trend growth” in the euro area, said Barry, the Ulster Bank economist. “But for the ECB to consider cutting, that would require a pretty sharp weakening in the economy and nothing so far is heading that way.”

(snip)

Some companies are raising salaries. German wages increased the most in 12 years in January, the statistics office said last month. Germany’s Ver.di union in March negotiated a settlement for as many as 2.1 million public-sector staff that is worth 8.9 percent over two years.

[top][end]

Weber Rules Out Changing ECB’s Current Inflation Goal

(Bloomberg) European Central Bank council member Axel Weber said revising the ECB’s definition of price stability would jeopardize the bank’s credibility at a time when fighting inflation is “of the essence.”

“I see no compelling reason why a temporary, albeit protracted, rise in energy and food prices should give rise to a discretionary change in the eurosystem’s stability norm,” Weber said at a conference in Frankfurt today. “It would risk unanchoring inflation expectations at a point in time where their solid anchoring is of the essence.”

The ECB defines price stability as keeping inflation just below 2 percent “over the medium term” and has struggled to meet that goal since taking charge of monetary policy in 1999. While economists including Joachim Fels of Morgan Stanley say the ECB should be open to changing its target, President Jean-Claude Trichet said May 8 he won’t consider it “for one second.”

“The present price hikes are a timely reminder that, when it comes to inflation, complacency is out of place,” said Weber, who is also head of Germany’s Bundesbank. “We cannot rest on our laurels where credibility is concerned.”

`Prepared to Act’
The ECB’s 21-member governing council is scheduled to hold its next assessment on interest rates on June 5.

“Over the past decade, the Eurosystem has shown that — if necessary — it is prepared to act in a firm and timely manner,” Weber said. “We will continue to do so over the next decades in order to maintain price stability.”

Surging energy costs pushed inflation to 3.6 percent in May, the most since 1992, from 3.3 percent in the previous month, the European Union’s statistics office in Luxembourg said today.

Economists forecast a 3.5 percent rate, according to the median of 36 estimates in a Bloomberg survey.

Surging food and oil prices “represent the latest, and arguably the most worrying, disturbance in a series of substantial upside price shocks,” Weber said.

Inflation expectations, as measured by French inflation-indexed bonds, rose to an all-time high of 2.46 percent on May 28 from around 2.1 percent two months ago.

A surge in inflation expectations close to 3 percent for this year “is hardly surprising,” Weber said. “Market participants and the general public are likely to readjust their short-term inflation expectations as soon as they observe inflation returning to a lower level.”

[top][end]

Trichet Says Pushing Down Inflation Is ECB’s Biggest Challenge

(Bloomberg) European Central Bank President Jean-Claude Trichet said the central bank’s “biggest challenge” is to push inflation just below 2 percent in the medium term, according to an interview with Bild newspaper.

“We have to be careful that current price shocks of food and oil don’t translate into price increases of other goods and exaggerated wage agreements, thus triggering a general inflation and wage wave,” Trichet told the newspaper in the interview published today. Bild translated his remarks into German.

Price stability “is and will always be the most important aim of the ECB,” Trichet told the newspaper. Regarding the global financial turbulence, the ECB continues to be “very alert and ready to act” if needed, he said.

[top][end]

Germany is the only large member of the euro zone where the measure of economic sentiment remains above its long-term average of 100.0. It rose slightly to 103.0 in May from 102.8 in April.

French economic sentiment in May fell below the 100.0 long-term average for the first time in more than a year, declining to 99.8 from 103.1 a month earlier. Sentiment remains well below average in Italy, Spain and Greece.

[top]

[Skip to the end]

Only the rising euro has kept the ecb from hiking, so far.

Highlights

[top]

[Skip to the end]

May be working through the ‘J’ curve.

The pace of the US trade gap falling at the ‘expense’ of the reverse happening elsewhere might be increasing.

More info with US march trade numbers due out soon.

World budget deficits are in general too small for robust growth with the financial sector in its current phase.

Saudis continue as price setter.

Crude outperforming most other commodities that are not subject to monopoly price setting.

[top]

As a point of logic seems their best move is to try to pressure the Fed to stop cutting.

Highlights:

Today’s headlines not conducive of a rate cut.

And the only thing the ECB sees that’s keeping inflation from being a lot worse is the strong euro.

So far, with inflation running well above target the ECB has decided it can’t afford to deliberately weaken the euro even with exporters screaming.

Europe Inflation Accelerates to 3.5%, Sentiment Drops

By Fergal O’Brien

(Bloomberg) European inflation accelerated to the fastest pace in almost 16 years, making it harder for the European Central Bank to cut interest rates as a global credit squeeze saps confidence among executives and consumers.

Consumer-price inflation in the euro area accelerated to 3.5 percent this month, the highest rate since June 1992, the European Union’s statistics office in Luxembourg said today. The euro rose after the publication of the figure, which was higher than economists had forecast. A separate report showed consumer and business confidence declined in March.

And that’s with a strong euro keeping import prices lower than otherwise.

“This will surely dash any residual hopes of a near-term rate cut,” said Dario Perkins, an economist at ABN Amro in London. “With inflation this high, it would take a major deterioration in the real economy to prompt the ECB to lower interest rates this year.”

Yes.

March inflation was faster than the 3.3 percent median forecast of 36 economists in a Bloomberg News survey and the acceleration pushed the rate further above the ECB’s 2 percent ceiling, a target it hasn’t achieved in the last eight years.

The euro rose as high as $1.5834 after the inflation report and was up 0.1 percent to $1.5807 as of 12:15 p.m. in London.

High inflation = Strong currency???

That’s the current paradigm as markets trade as if interest rates are more important for currency pricing rather than purchasing power parity.

Still, there are signs the euro-area economy is so far weathering the U.S.-led slowdown. German and French business confidence climbed in March and unemployment in the euro region was a record low 7.1 percent in January.

Low unemployment scares the ECB a lot.

If the euro hadn’t been as strong as it is, inflation would be that much higher over there.

Highlights:

Countercyclical budget deficit growth could bring on a national credit crisis in the Eurozone that makes the current US situation look like child’s play.

This is their vulnerability that came with the Maastricht Treaty and has yet to be tested.

Italy Halves Growth Forecast, Sees Deficit Rising

by Flavia Krause-Jackson

(Bloomberg) The Italian government cut its 2008 economic growth forecast by more than half, as slumping confidence and rising prices threaten to brake expansion to the slowest among the 15 nations that share the euro.

The $2.2 trillion economy, Europe’s fourth-biggest, will grow 0.6 percent this year, the Rome-based Finance Ministry said today in a statement. That’s down from a forecast of 1.5 percent in December and would be the weakest rate of growth since 2005.

Italy may be the first and only country in the euro region to enter a recession this year and may have contracted in the fourth quarter, according to Morgan Stanley economist Vladimir Pillonca. Growth is slowing just as rising food and energy prices are fueling inflation and sapping consumer and business confidence.

“If you add to the mix an international situation that is now weaker than expected, this creates a real mess in a country where productivity was already declining,” said Luigi Speranza, an economist at NP Paribas SA in London.

Italy’s budget deficit will rise to 2.4 percent of gross domestic product, more than the 2.2 percent formerly predicted though still under the European Union ceiling of 3 percent. The shortfall narrowed last year to 1.9 percent of gross domestic product, the least since 2000, the Rome-based national statistics office said Feb. 29. That’s about half the 2006 deficit of 3.4 percent.

European News Highlights:

rising MNOG (minimum noninflationary output gap) as inflation rises at current levels of GDP. (see below.)

import prices are rising there even with the strong euro, implying if the euro wasn’t as strong import prices would be that much higher.

US beggar thy neighbor policy is robbing demand from the eurozone

If GDP holds up with inflation this high and rising, the ECB then has to engineer a larger output gap.

ECB’s Weber Sees `Little’ Room to Cut Interest Rates

by Simone Meier and Gabi Thesing
(Bloomberg) European Central Bank council member Axel Weber said the bank has little room to lower interest rates with the economy operating near full capacity and oil prices at a record.

“The output gap is such that it doesn’t give me a lot of comfort that it will lead to a strong disinflationary effect in the period to come,” Weber told reporters in Oslo today. Coupled with external price shocks such as surging oil and food prices, “there is very little room to maneuver.”

The ECB yesterday kept its main lending rate at a six-year high of 4 percent to curb inflation even as the euro’s appreciation and slower U.S. expansion threaten to curb economic growth. Weber said today that there’s an “unusual amount of uncertainty” on both the outlook for growth and inflation.

“The current policy stance in the euro area has to be judged as contributing to achieving our medium-term objective of price stability,” Weber said. “Weaker growth prospects do not pose sufficient reason to expect a damping of inflationary pressures in the foreseeable future.”

The ECB yesterday revised up its inflation forecast for this year to about 2.9 percent, which would be the highest annual average rate since 1993, according to International Monetary Fund figures. The bank also predicted inflation would average about 2.1 percent in 2009, breaching its 2 percent limit for a 10th year.

“Due to increases in unit wage costs, core inflation rates are projected to equally exceed the 2 percent margin over the course of 2008,” Weber, who is also president of Germany’s Bundesbank, said. “And even taking into account a forecast horizon beyond 2008 gives no sign for relief.”

Weber said the bank will “do what is necessary” to quell inflation risks.

Economic growth in the 15-nation euro region will show a “gradual recovery toward potential rates” of around 2 percent in the second half of 2008, he said.

And, of course, that’s a bad thing when inflation is too high to begin with.

Should the Fed turn it’s attention to inflation, it will find itself way behind that curve.

The US cpi is about 100 bp higher than the eurozone cpi’s, including the UK where rates are north of 5%.

With US inflation where it is, the mainstream calculation for the appropriate ff rate is probably north of 7%.

The way the mainstream now sees it, the more the Fed cuts to get ahead of the ‘economy curve’ (whatever that is), the further it gets behind the inflation curve.

At this point if may not take much in the way of economic ‘improvement’ to redirect the Fed’s attention. A sign of a housing turn might be sufficient.

And with a general inflation underway, housing prices will go up as well, regardless of weakness, due to cost pressures, much like the late 70’s.

Highlights:

This is the mainstream approach to negative supply shocks:

“Don’t let relative value stories turn into inflation stories.” (as the Fed used to say)

And, they say, if you wait for the economy to get strong bringing the higher rates of inflation down gets more than that much harder.

STOCKHOLM, Sweden - Sweden’s central bank on Wednesday made a surprise increase in its key interest rate by a quarter of a percentage point to 4.25 percent in a move to keep inflation in check.

The hike surprised many market watchers who had expected the Riksbank to either cut its benchmark repo rate or keep it unchanged at 4 percent.

“There were expectations on a reduction. It was a surprising increase,” Handelsbanken analyst Marcus Hallberg was quoted as saying by Swedish news agency TT.

The bank said it expects the interest rate to stay “roughly” at the same level for the rest of the year. But in Wednesday’s announcement, the bank warned that “there is still considerable uncertainty regarding the economic outlook and inflation prospects,” and cautioned that while it currently expects the repo rate to stay near the new level, “there is considerable uncertainty in this assessment.”

The bank’s further course would depend on how economic developments abroad affect Sweden’s economic activity and inflation, it said.

Although economic activity remains strong, the bank said it deemed inflation to be high, and the rate rise will help to bring inflation back toward the target of 2 percent “a couple of years ahead.”

Inflation, or consumer price index, has been rising steadily in recent years and is now at 3.5 percent.

The bank said that “gross domestic product growth will slow down over the year and the increase in employment will slacken. Resource utilization in the economy will nevertheless be higher than normal.”

Inflation has been pushed up mainly by higher food and energy prices as well as cost pressures.

The bank said the continued global market financial turmoil and the unrest in the U.S., has led to “great uncertainty” and that recent developments in the financial markets mean that “the risk of weaker growth in the world economy has increased.”

Davide Stroppa, an economist at Bayerische Hypo- und Vereinsbank AG, described the raise as a “shock” in a research note.

“As we see it, with today’s move, the Riksbank exploited the window opportunity to deliver a hike before it will be too late and the dilemma of risks of a slower (although still quite respectable) growth and higher inflation would be solved in favor of the former.”

Sweden’s repo rate was last raised in October, by a quarter of a percentage point to 4 percent.

(an interoffice email)

I’m thinking they had to do something about the euro.

the eurozone exporters can be very convincing

warren

On Feb 7, 2008 10:41 AM, Karim wrote:
>
>
>
> Is taking hikes off the table, so:
>
> 1) No mention of acting ‘pre-emptively’
>
> 2) No one voted to hike (or cut) at meeting
>
> 3) Trichet: “I never subscribed to theory of decoupling’
>
> 4) Downside risks to growth now ‘confirmed’
>
>
>
> All the usual references to preventing 2nd round effects not new, 1-4 above
> is.