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Europe's own recession?

Written by A Forex View From Afar on Wednesday, January 23, 2008

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Most of the major news sources, Bloomberg, WSJ, Reuters and FT are reporting the ECB's refuse to cut rates, because of still seeing inflations as a major risk.

To most analysts, it seems that Mr. Trichet is running against the wind, refusing to cut rates and still speaking of inflation. They all see the ECB cutting rates by summer of 2008.
As a note, the ECB is not alone, China is on that tack too, Russia stopped cutting rates in the summer of 2007.and how we said in an article all EU members with free currency float raise rates (link here)

Their Thoughts:

"BNP Paribas SA today said it now expects the ECB to lower its key rate to 3.75 percent in June rather than September. Barclays Capital said the central bank will reduce rates twice this year instead of keeping them unchanged."

`Europe is not going to get special dispensation from a global slowdown,'' Stephen Roach, chairman of Morgan Stanley in Asia

"This set of data will not change the ECB's rhetoric in the very near term, but it's becoming increasingly clear that... growth has started to down-shift," said Marco Valli, an economist at UniCredit in Milan. "A more cautious ECB stance seems warranted at this stage. We expect them to start cutting rates" sometime in the third quarter, he said."

Probably, Mr. Trichet runs on the idea that ECB is formed by more countries, not just one, like the other central banks are. This was quite unique until now; different countries have different ways to do things, like fiscal policy, trade routes, industries and so on. Fiscal Policy is as important as monetary policy, traders should note.

This may be a big plus for Europe, but until now no studies had been made.
While increasing rates twice in 2007, the M3 actually grew 12%, which is pretty big. M3 defines the liquidity in the market and a rate cut should have reduced it; but it didn't. Growing liquidity in the markets can be an answer to the credit crunch, and the ECB has a 'giving away' attitude through open markets operations.

The markets have been good to us giving 600+ pips this year, so we offer you the candy on top of the cake

It's an image generated by Google Trends showing how much volume the word "recession" generated, both in news (the smaller chart) and in google search (the big chart). With such an increase in volume, probably reaching everyone's ears, recession is one step closer.(this is only a joke)

One more thought, the source of most searches that came from US (and second in the world) is Washington. Should we imagine:

12:01 Oil_George> Paul, go google recession, see if something new came?
12:02 Paul_I_Count> Nope, nothing new...
12:03 Oil_George> How about now?
12:04 Paul_I_Count> Nothing new , probably they don't believe our tales
12:05 Oil_George> How about now, anything new?
And so on...
Bloomberg: Trichet Says ECB Still Focused on Fighting Inflation
Reuters: Trichet says ECB must stay focused on inflation
WSJ: ECB Offers No Signs of Rate Cut as Central Banks Respond to Fed
FT: ECB resists pressure to cut rates

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