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EUROPE'S PULSE-A daily note from our Economics Editor

Source: Reuters - Fri, 26 Jul 2013 10:17 GMT
Author: Reuters
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(A daily view of what's eye-catching in Europe from EMEA Economics Editor Mike Peacock. The views expressed are his own)

July 26 (Reuters) - For Europe and the wider world there has been no such thing as a summer lull for the past five years. This time, we might just get one, but it won't start next week.

The Federal Reserve's policy meeting is the proverbial elephant in the room but European Central Bank and Bank of England meetings aren't far behind, there's a raft of top line economic data to inspect for hints that Europe is picking itself off the floor, and some big bond auctions to test the market.

Latest reports suggest Ben Bernanke might attempt a fresh tweak of his narrative about a plan to start slowing dollar-printing from $85 billion a month with a view to halting by mid-2014. After the ructions that caused in May and June, he may try and reinforce the fact (which seemed quite obvious but eluded many) that none of that meant interest rates would necessarily rise in the next year or two.

Given how this stuff can backfire, the pressure will be on ECB chief Mario Draghi again to convince markets that just because the Fed is on the move doesn't mean the ECB is too.

His stab at "forward guidance" last month was partially successful in calming markets but this is an ongoing process, not least because the ECB's steer - that it expects rates to stay at record lows for an extended period - is vaguer than the Fed's, which has attached any move to an unemployment target. There have also been some mixed messages since the last policy meeting.

The Bank of England under Mark Carney will probably steer closer to the Fed than the ECB when it issues its forward guidance plan with its quarterly inflation report on August 7. Thursday's policy meeting will certainly not change interest rates or sanction more money-printing but - having broken with the tradition that no policy change is followed by silence - there may be another statement which moves the story forward.

Back to the glimmers of incipient growth. PMI surveys in recent days have suggested the euro zone could exit recession in the third quarter and begin growing again. Spain will do just that, according to its central bank, and its unemployment rate has fallen for the first time in two years.

Italian consumer morale is picking up and retail sales have risen for the first time in 14 months. There are also signs of life in France where consumer spending may be recovering. Latest figures on that are due on Thursday. But for the most parlously placed - Greece and Portugal - there is no such luck.

This is very early days and interestingly it might be that Germany does not race away from the pack this time. Both the government and Bundesbank are forecasting a robust second quarter but then something of a relapse in the third.

German unemployment and inflation figures will be released during the week with the latter, together with the euro zone inflation number, going some way to show how much leeway the ECB has to loosen policy further. The forecast is for the rate to hold at 1.6 percent, somewhat below the target of close to but below two percent.

Full manufacturing PMI surveys for euro zone countries and Britain will flesh out the picture as will GDP releases from Belgium and Sweden. For investors, there are signs that most of the positive surprises are currently coming from Europe (what with China's slowing growth and credit problems and the fact the U.S. recovery is a well-entrenched theme).

Reuters monthly asset allocation polls, to be published on Wednesday, will give the latest snapshot of where the serious money is flowing.

With tentative signs of a turnaround in the euro zone and Britain more certainly starting to turn the corner, the odds are that both Carney and Draghi will look to forward guidance to keep a lid on market rates, thereby avoiding the need for more dramatic policy action.

Still, 30 of 47 economists in this week's Reuters poll said the central bank had yet to rule out topping up the 375 billion pounds ($574 billion) of bonds already purchased. In a separate poll of 70 economists, only a quarter of respondents forecast a further cut to the ECB's main refinancing rate from its record low 0.5 percent.

Talking of serious money, Italy and Spain return to the market with bond auctions. Italy will sell up to 6.75 billion euros ($8.9 billion) of five- and 10-year bonds on Tuesday, after 8.5 billion euros of six-month bills on Monday. Details of Spain's Thursday sale are yet to be released. At the other end of the safety spectrum, Berlin will sell up to two billion euros of five-year notes.

Markets have recovered their poise since Bernanke spelt out in words of few syllables that "tapering" does not mean rate rises and won't happen abruptly. So the backdrop is not unfavourable for selling debt. Spain has an unfortunate confluence of events, though, with Thursday's auction coinciding with Prime Minister Mariano Rajoy appearing in parliament to answer questions about a corruption scandal.

The arrested former treasurer of the ruling People's Party claims he ran shadow accounts for the party for many years and that Rajoy was the recipient of hand-outs from a fund created from business contributions. True or not, opinion polls are showing an increasing level of disenchantment.

For the euro zone's major flashpoints - Portugal and Greece - things have calmed a little, though probably only for the remainder of the summer.

After a messy, self-inflicted political crisis, Portugal's reshuffled coalition has formally stuck with the measures required by the EU and IMF in return for rescue loans and Greece has adopted the last piece of legislation needed to free the next tranche of its bailout loans on Monday.

But yet again, this is crisis deferred not resolved. The troika of international lenders will return in the autumn to ascertain whether the government needs to find further savings to meet its 2015-2016 budget targets. Prime Minister Antonis Samaras and his only remaining coalition partner, Socialist leader Evangelos Venizelos, have ruled out any further austerity measures.

As for Portugal, most analysts now doubt it can exit its bailout next year, as planned, and think it will need further outside help.

Italian Prime Minister Enrico Letta will be in Athens for talks on Sunday and Monday. ($1 = 0.6530 British pounds) ($1 = 0.7555 euros) (Editing by Ruth Pitchford)

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