… on the back of European rate-cutting noises. Even Axel Weber, the German chairman of the ECB, suggested that European central bankers “shouldn’t over-dramatize” the current rates of inflation. Yves Mersch, the banker whose comments triggered today’s euro sell-off, is also considered a hawk.
“Mersch is considered to be a hawk,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “It’s a change in tone to hear him talking down the growth outlook. The discussion about a cut is about to start.”
Mersch is the latest policy maker to note either downside risks to the economic outlook or the temporary nature of the jump in inflation.
Inflation, which held at 3.1 percent in December, may return to the ECB’s 2 percent limit next year if oil prices ease and wages don’t rise excessively, Bonello, Weber and Executive Board member Lorenzo Bini Smaghi said.
The ECB can afford to ignore an oil-driven surge in inflation if it doesn’t inflate wage settlements, Mersch said. “If there’s no pass-through of these temporary factors to the general price level, we’re able to look through if need be.”
While rising oil and food costs have increased the likelihood of so-called second-round effects materializing, they “haven’t materialized so far,” Mersch said. Financial-market uncertainty and “other international developments” may “weigh on the inflation development.”
Asked if the ECB will act to curb inflation, Mersch said: “If needed. But we will keep all flexibility in order to assess whether there is a need at each meeting of the governing council.”
My prediction of a US equities rally today really crapped out, unfortunately. But I wasn’t too far off when I called the euro’s peak. Unless Trichet plans on shoving Italy and Greece out of the eurozone, he will have to start easing.
Now, according to my framework, European money should start plowing into precious metals to hedge against a round of ECB devaluation. That definitely didn’t happen today: gold dropped 2.3 percent in dollar terms (1.3 percent real).
European monetary policy is torn between German uberhawks and Mediterranean doves. With the accession of Bank of Cyprus chairman Athanasios Orphanides, however, Mediterranean doves have an ECB majority for the first time in the Bank’s history. The consequences for the euro will be real as well as punitive.
Meanwhile, inflation remains at secular highs all over the world, notwithstanding a six-month drumbeat of recession psychology.
December and January are the seasonal peaks for gold, and so I’m not surprised at today’s selloff, particularly given today’s USD surge on the back of dovish ECB comments. But I think gold has life in her yet.
However, I think general US equities–dare I say financials?–offer the best value right now. With inflation surging and T-bill rates already so low, why would anybody want to buy more Treasuries?