Stronger euro after ECB-hike

illustration: euro

(08.07.2011) ECB hiked the refi rate as expected yesterday. Even if this was widely expected in advance, the euro strengthened vs the dollar after the decision. Today, the US payrolls may surprise on the upside after the positive ADP-report yesterday.

By Knut A. Magnussen, Senior Economist at DNB Markets

As expected the ECB hiked the refi rate by 25 bp. to 1.5% at the board meeting yesterday. According to Trichet the decision was unanimous and he said that the hike was necessary in order to maintain price stability in the medium term. He was very satisfied by being ahead of the curve, but as usual said nothing particular on the outlook for further hikes.

However, he used the phrase that inflation risk will be monitored very closely, which usually implies that there will be another hike in the pipeline. However, the hike will probably not materialize until September or October. At the press conference Mr Trichet also said that the ECB says no to “selective default” regarding Greece. He also informed that the central bank will continue to support Portugal with ample liquidity and the rating requirement for Portuguese debt was suspended
Several European countries yesterday released data for industrial production. German industrial production rose more than expected in May. The increase was 1.2%, while only 0.6% was expected in advance. In particular car production rose strongly. Still sound order developments and a high ifo-index indicate that production will continue growing. If production is unchanged in June the growth rate for Q2 will be 1.3% - about half the gain in Q1.

manufacturing production also rose more than anticipated in May. The increase was 1.8% - while it was expected that production would grow by 1.0%. A sharp drop in energy production implied that the growth rate for industrial production, growing by a more modest 0.9%.  The trend has been flat for a while after a decline in both February and April. Hence, it seems that the manufacturing sector will not lift GDP-growth much in Q2. Bank of England kept the bank rate unchanged at the meeting yesterday.

Norwegian manufacturing production also surprised on the upside in Ma
y, growing by a healthy 2.4%. It was expected that production would grow by a more modest 0.7%. The underlying trend is now positive. According to Statistics Norway three industries noted a large gain in May: Textiles (10%), paper (25%) and ships and oil platforms (12.5%). Surveys such as the PMI point at further gains in production going forward.   
In the US the ADP-report for private employment surprised on the upside for June showing an increase of 157.000 while only 60.000 was expected. Most of the increase took place in small and medium sixed companies, but even large companies noted a small gain this month. The weekly initial claims data was well in line with expectations last week, at close to 420.000. The still high level shows that the labour market improvement is still slow. However, the ADP-report was positive and indicate that the payrolls due today may also surprise on the upside. According to Reuters it is expected that employment will grow by 90.000 and the unemployment rate is expected to stay unchanged at 9.1%.  
New signals from the US yesterday indicate that a large austerity package (probably 4000 bill. USD) may be approved before the start of August, hence preventing a debt crisis. According to president Obama a constructive meeting was held yesterday and negotiations will resume on Sunday. However, the parties still disagree on major issues. The republicans are still opposed to all kinds of tax hikes, while the democrats would like to shelter Medicare and Social Security from budget cuts. Hence there is still a way to go to reach a deal.