Euro decisions delayed until June

(24.03.2011) The resignation of Portugal's minority government and reports that the expected clarifications on the European emergency fund are delayed, weighs on the euro. Yesterday's minutes from Bank of England was more dovish than expected, and led to a weaker pound.

By Kjersti Haugland, Analyst at DNB Markets

euroWeakened faith in euro leaders' ability to cooperate and make tough decisions to resolve debt issues, is weighing on the euro. The conclusion published on 11 March by the euro leaders implied an increase in the effective lending capacity of the temporary emergency fund to 440 bn euros (and the forthcoming permanent fund to 500 bn euros). Greece was granted lower interest rates and a prolonged payment period to be able to handle their liabilities. Details regarding how the enhanced capacity should be achieved, and the question whether Ireland should also be granted eased borrowing conditions (in exchange for the sacrifice of its low corporate tax level), was expected to be known by the end of the two-day-long European Council meeting starting today.

Yesterday it became clear that we will have to wait until end-June to have more answers. The euro leaders need time to discuss the matters in their national parliaments. Chancellor Angela Merkel is struggling at home, losing voters ahead of Sunday's regional election in important Baden-Wurttemberg. With a dissolved parliament ahead of its mid-April election, Finland will not be able to make formal decisions until a new government is in place. Portugal's minority government resigned yesterday after the parliament rejected its new and tougher austerity measure package. Even though the outcome was widely expected by the markets, the interest rate on Portugal's sovereign debt reached new heights during the day.

The pound sterling weakened after the release of Bank of England's minutes from the meeting earlier this month. As expected, the vote was unchanged from the previous meeting. Three members voted for a hike (one by 50 basis points, two by 25 basis points), six members voted for an unchanged rate, and Posen still wanted to increase asset purchases. The discussion was slightly more dovish than expected. The committee viewed the uncertainty, both for inflation and growth, as larger than before, due to surging oil prices. The Japanese catastrophe two weeks ago will hardly serve to reduce the uncertainty in the upcoming meeting. The minutes also showed that the committee viewed the probability of inflation above 5% in the near future as significant. Hence, Tuesday's high inflation number may have been less of a surprise to the committee than previously though.

The Chancellor of the Exchequer sticks to his coalition government's plan to cut the primary deficit from 10% to zero in the course of the coming four years. When releasing the 2011 Budget yesterday, Osbourne had sweetened the pill with a larger cut in taxes on companies (at the same time increasing bank's tax burden) and a surprising cut in fuels duty. As expected, UK's borrowing needs will be larger than previously assumed in the coming years, due to higher inflation and lower growth than expected.

NOK strengthened after the news that LFS unemployment in January (average Dec-Feb), declined unexpectedly. While consensus was for unchanged unemployment at 3.4%, the rate fell from downwardly revised 3.3% in December to 3.2%. Norges Bank's estimate, as our own, implies stable unemployment in 2011, at 3.5%. Details behind the survey are less impressive though: the labour force fell, while employment was stable.

US new homes sales fell by 16.9% m/m in February, to record low 250 000 units (annualised). The development in this segment is particularly depressed, since house buyers prefer bargains due to foreclosure sales of existing homes. Bottom line: it will take time before housing investment may contribute to growth in the US economy again.