Euro Nears Record Quarterly Decline

Euro Nears Record Quarterly Decline

The final day of the quarter is a natural time for taking stock of progress for the year so far and it’s been a terrible time for the euro, the worst on record in fact.  

Euro Nears Record Quarterly Decline
Euro Nears Record Quarterly Decline

But it is a great time for European stock indices, particularly the German DAX which has surged over 20% since the start of the year, a simply incredible performance.

A devalued currency and a boosted stock market is what we would expect as a consequence from quantitative easing, other things being equal, and there are signs now that the new stimulus program from the ECB is beginning to gain traction. We saw a big lift in German CPI yesterday and today’s report for eurozone inflation also showed improvement. The preliminary Harmonized Index of Consumer Prices (HCIP) for March came in at -0.1% (change year-over-year), in line with the consensus estimate, and up from -0.3% in February. Prices in the services sector are showing annual inflation of 1.0%, the leading main component, while the biggest drag came from energy, which was -5.8%, though this is an improvement from February when energy prices were showing an annual inflation rate of -7.8%.

It’s been another weak day for the euro so far, with EUR/USD sliding 0.8% to 1.0748 by 9am in New York. The euro has slumped 11% against the dollar in 2015, a move that has been driven by the divergence of monetary policy between the two relevant central banks. While the ECB recently initiated a huge QE scheme that is set to run deep into 2016 at least, the Fed is widely expected to tighten policy later this year.

The Fed has stated that it will be looking at a wide range of economic factors when making the decision of whether it is appropriate to raise interest rates. So far the labor market is looking very healthy (the key monthly employment situation report is released for March at the end of the week), manufacturing has been mixed, housing has been sluggish and inflation remains substantially below target.

There are some signs that housing might be gaining some momentum and pulling itself out of this sluggish phase though: yesterday we saw the pending home sales index climb 3.1% for February and today saw some bullish home price data. Case-Shiller’s 20-city home price index rose a seasonally-adjusted 0.9% in January, the joint-fastest pace of increase since last March, and the annual change improved to 4.6% from 4.5% in December.

Richmond Fed President Jeffrey Lacker, who historically has taken a hawkish stance, claims rates should be higher based on existing data. ‘Given what we know today, a strong case can be made that the federal funds rate should be higher than it is now,’ he said in a prepared text for a speech on the economic outlook in Richmond today. ‘I expect that, unless incoming economic reports diverge substantially from projections, the case for raising rates will remain strong at the June meeting.’

Stocks on Wall Street opened weaker today, following yesterday’s sharp gains. Shortly after the opening the Dow Jones was down 72 points or 0.40% at 17,903, while the broader S&P 500 Index fell slightly more sharply, dropping 0.52% to 2075.4.

US consumer confidence rose to 101.3 in March from an upwardly-revised 98.8 in February, whi was a much higher result than expected. The Conference Board’s Consumer Confidence index for March is due at 10.00 ET, the highlight of Tuesday’s economic calendar. A fall to 95.5 from February’s level of 96.4 is expected.

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