The Week In Hindsight, 07 July 2014

A week of press conferences and policy maker statements saw yet more mixed views over European monetary policy aired in public.

This was as Christine Lagarde, the Managing Director of the IMF, described low inflation (particularly in the euro-zone) as one of the greatest risks to global growth and stability when speaking at the Cercle des Economists conference in Aix-en-Provence, in southern France.

She later recommended “careful and well thought out” public investment in infrastructure for developed economies as a suitable means of engineering growth.

This was before ECB Governing Council member and head of the French central bank Christian Noyer warned against public investment in infrastructure as a means of spurring growth, particularly in cases where such investment is debt funded.

The French central bank governor also described his surprise at the ineffectiveness of June’s ECB policy measures, indicating diverging views among the continent’s policy makers on how to right the economy.

Elsewhere on the continent, the ECB’s monthly press conference saw Mario Draghi defending the the bank’s June actions with more statements about remaining vigilant to signs of deflation while allowing existing measures time to take effect.

In relation to economic data; numbers emerging from Germany over the last week have continued to underwhelm, highlighting the challenges faced by the bloc’s largest economy as it attempts to remain afloat amidst an armada of ships which, in some cases, continue to take on water.

On this note, May industrial production saw its steepest decline for two years, while retail sales fell and unemployment also experienced a moderate uptick. This was as the Italian manufacturing outlook deteriorated modestly and unemployment underwent a minor increase.

The Markit Italian Manufacturing PMI fell to 52.6 from 53.5 during June, while the unemployment rate rose from 12.5% to 12.6%.

On a more positive note, activity stirred in Spain; another one of the bloc’s largest economies. This was as the Markit Manufacturing PMI saw an increase from 53.2 to 54.0, indicating that purchasing managers in Spain have recently grown more optimistic about the future outlook for the sector.

In short, while growth in the euro-zone has stirred over the last 12 months, momentum remains low while disinflation and deflation continue to pose a credible threat to the longer term outlook.

Although the stimulus measures that result from this situation are positive for equity markets, the longer term effects of “too little, too late” actions could threaten to undo much of the above referenced gains in growth as well as equity portfolio returns.

While it is not our central view that disinflation will evolve into deflation, that then becomes entrenched; we will remain vigilant to signs of whether ECB measures are proving effective over the medium term and shall report back our views accordingly.

EU Indices (DAX, Black), (IBEX, Red), (CAC40, Blue)