Greece blinking Will Italy or Spain barge doors first..?

PIMCO sees as MINSKY for 2012

 
PIMCO Cyclical Outlook: Deleveraging, Austerity and Europe’s Potential Minsky Moment

• ​As things stand today, it is more likely that the ECB will leap to a rescue only when it is too late. Absent any increase in private or external sources of aggregate demand, the eurozone economy will likely experience a recession in 2012.
• Chinese deleveraging and rebalancing could mean much slower Chinese growth and a smaller impact of Chinese aggregate demand on the global economy.
• We expect the global economy to grow by 1% to 1.5% in 2012. This is significantly slower than the 2.5% growth rate achieved in 2011 and the 4.1% rate achieved in 2010. 

The year ahead will likely be very challenging for the global economy. Growth faces several hurdles that we believe collectively will impose a sense of greater uncertainty and increased volatility on financial markets. These hurdles include the need for accelerated balance sheet deleveraging, slowly creeping but surely rising risks of financial and economic de-globalization, and the constant drum beat of re-regulation, particularly in developed country banking systems.

Global balance sheet deleveraging will play the dominant role in PIMCO's current cyclical economic outlook. Front and center in this regard is the rapidly progressing sovereign debt crisis in the eurozone, the debt deflationary feedback loop associated with it, and the quality and quantity of policy responses applied to contain it. As goes the eurozone deleveraging, so goes the global economy over the next six to 12 months.

 

The eurozone is facing an accelerated reversal of imbalances accumulated over several years after the creation of the euro. These imbalances are the product of differing real trends in productivity, labor flexibility, and national savings and investment rates across the member nations of the eurozone. Prior to the implementation of the single European currency, current members had individual currencies and individual control of their respective money supply, making it relatively easy to absorb real economic differences via relative currency value changes and inflation differentials. Today, however, those countries that adopted the euro do not possess the same degree of flexibility needed to smoothly diffuse frictions along these fault-lines. With one common currency and one common central bank, but individual fiscal agents and differentiated trends in economic performance and governance, the full burden of reversing sovereign deficit and debt imbalances falls onto the shoulders of only the fiscal agents. And as we see it, fiscal agents have one option and one option alone: deleverage the government balance sheet by practicing secular austerity.

 

To judge the impact of eurozone deleveraging on the global economy, we must answer three questions. First, how much austerity will the eurozone impose upon itself to restore the balance between debtors and creditors? Second, will eurozone sovereign haircuts or defaults remain a part of the deleveraging process? And third, what role will the European Central Bank (ECB) play in controlling the depth, breadth and velocity of sovereign debt deleveraging?

 

Stress Testing the Plan
Eurozone governments are about to legislate a plan of significant fiscal austerity over the coming years. By PIMCO estimates, austerity programs across both healthy and unhealthy balance sheet countries in the eurozone will pose a drag on growth to the tune of 1.5 to 2 percentage points over the next 12 to 24 months. This means that, absent any increase in private or external sources of aggregate demand, the eurozone economy will likely experience a recession in 2012. Indeed, PIMCO expects the eurozone economy to shrink by 1% to 1.5% in 2012.

 

Eurozone sovereign haircuts and defaults will likely remain a part of the deleveraging outlook. The acceleration of the European Stability Mechanism (ESM) and the introduction of collective action clauses on newly issued sovereign debt under the ESM mean that future haircuts, write-downs and private-sector subordination are still possible -- and probable. This, in turn, means that eurozone banks -- which have been the chief private-sector financiers of eurozone sovereigns -- will need a substantial amount of new capital to maintain their own balance sheets and provide ongoing credit to the real economy for growth. This new capital will be needed primarily to fill the ex ante equity hole generated by now “risky" sovereign credit exposures. It will also be a necessary condition for maintaining an effective monetary policy transmission mechanism to the eurozone real economy. If eurozone banks remain under-capitalized for much longer, their borrowing costs could climb too high for credit growth, and they would be forced to deleverage private credit commitments at a time when eurozone sovereigns are attempting to do the same with fiscal policy.

 

To be clear: The eurozone economy cannot bear a concomitant deleveraging in sovereign and banking system balance sheets, given an already weak growth outlook.

 

The ECB, therefore, must play the critical role of deleveraging police in the year ahead. Only the ECB has a balance sheet large enough, credible enough, and flexible enough to prevent the eurozone sovereign and banking system deleveraging from turning into an uncontrolled Minsky Moment (referencing economist Hyman Minsky and referring to the inflection point when investors must sell assets to pay off debts, pushing down asset prices across the board). An acceleration of the debt deflationary feedback loop will be the odds-on outcome if the ECB continues to play coy with its own balance sheet. The ECB must, at some juncture in the not so distant future, become a lender of last resort to eurozone sovereigns. And, equally important, it must do so with a transparent and credible plan such that private sector demand for eurozone sovereign debt is crowded back in before it is permanently destroyed. 

 

But what will it take for the ECB to make this leap from a bankers' banker to a sovereigns’ banker? To begin to answer this question, we have to consider the mandate of the ECB and the "game of chicken" being played between European fiscal agent and the ECB.

 

The ECB’s Evolving Mission
First, the ECB has a clear mandate of maintaining price stability and nothing else. In the best traditions of the German Bundesbank, the ECB maintains fierce independence from fiscal policy and financing sovereign deficits and does not believe it is responsible for shaping cyclical real growth outcomes (unlike the U.S. Federal Reserve). A key question, however, is whether the ECB's mandate is symmetrical around low and stable inflation? Will the ECB act aggressively to combat deflation, as it does to combat above-target inflation when the time comes? And if it will, what tools will it be willing to use, especially if policy rates are already at the zero-bound and the transmission mechanism of policy is broken? At this point, the rate of inflation in the eurozone is too high for the ECB's liking and is thus likely to prevent the ECB from taking any dramatic steps to pre-emptively combat the forward deflation risks arising from a deteriorating economic outlook across the eurozone.

 

Second, the ECB is engaged in a dangerous but necessary game of chicken with eurozone fiscal agents, which prevents it from becoming a transparent and credible lender of last resort to eurozone sovereigns. On the one hand, with the credit transmission mechanism broken and bank balance sheets stressed, the ECB recognizes that it must prevent sovereign bond prices from falling too far. On the other hand, the ECB remains fearful of introducing secular moral hazard into the process of enhancing fiscal unity and stability across the eurozone by pre-emptively financing fiscal deficits. This game cannot continue for too much longer. If it does, we believe either the deteriorating economic prospects for the eurozone will accelerate the feedback loop to its Minsky Moment, at which point sovereigns and banks will enter a race to try to out-deleverage the other; or the ECB will take pre-emptive action to become a transparent and credible lender of last resort to sovereigns thereby stabilizing the eurozone banking system and the eurozone economy. As things stand today, it is more likely that the ECB will leap to a rescue only when it is too late. As a result, the odds of a European Minsky Moment are uncomfortably high now.

 

Chinese Growth Levels Off as U.S. Deleveraging Continues
Moving from Europe to Asia, China has joined the U.S., the eurozone, Japan, and the UK in some form of balance sheet deleveraging. However, we expect Chinese deleveraging to be rather benign as long as policymakers use their substantial financial resources to manage the process over time. China for the last two years has engaged in an accelerated program of domestic investment via rapid credit creation in its domestic banking system. This has provided the global economy with a substantial and much-needed boost to aggregate demand at a time when developed economies were all undergoing private sector deleveraging. But this source of global aggregate demand is slowing significantly now. 

 

Due to a combination of issues ranging from excess capacity, rising income inequality and bank capital stresses that will require a slowdown in the rate of credit creation, China is likely to slow future domestic investment in favor of a more balanced and stability focused growth model. China is likely to use its substantial public financial resources to address imbalances between domestic investment and consumption, between capital and labor shares of national income, and to slowly re-capitalize its banking system as non-performing loans crystallize to losses. The major implication for the global economy is that the process of Chinese deleveraging and rebalancing could mean much slower Chinese growth and a smaller impact of Chinese aggregate demand on the global economy. PIMCO expects the Chinese economy to grow by just 7% in 2012, significantly below consensus expectations of 8% to 8.5% real growth.

 

And what of the States? The U.S. economy continues to make steady progress in private sector deleveraging, but little to no progress when public sector balance sheets are included. U.S. households and banks have generally reduced debt either via defaults or orderly recapitalizations, and many companies have benefitted tremendously from a weaker dollar and strong growth in global trade via the emerging market economies. Despite the progress made to date, the process of U.S. deleveraging is not nearly complete. This is especially the case given that the U.S. government continues to run large structural deficits to support private sector aggregate demand, and that demographically driven unfunded liabilities are starting to crystallize onto public balance sheets at a faster rate.

 

Were it not for the brewing crisis in the eurozone, and the expected slowdown in aggregate demand in China (and other emerging economies), the outlook for the U.S. economy might have been relatively sanguine for the year ahead. In 2011, U.S. GDP grew by a modest but decent 1.5% to 1.75%. But with global headwinds gathering -- and U.S. expansionary fiscal policy becoming much more difficult to maintain -- we think the U.S. economy will only manage 0% to 1% growth in 2012. This is substantially below the industry consensus expectation of 2% to 2.5% growth.

 

Turning from deleveraging to de-globalization, we believe the most important component of this creeping process is occurring in global finance. Global imbalances between savings and investment have long been sustained via cross-border intermediation across an integrated global banking system. European banks have played the major role in this process, with American and Asian banks being perhaps a degree less important. We have discussed the potential impact of European bank deleveraging on the eurozone economy, but have not spent much time on how they might impact the global economy in a direct way. The eurozone banking system is 2.5 times as large as the U.S. banking system, in part because it plays an important role in intermediating global savings. At $41 trillion in total balance sheet assets, the impact of a eurozone banking system deleveraging would dwarf the effect of any successful re-leveraging of the U.S. banking system, which is only about $16 trillion in size. The race to higher capital ratios combined with sovereign stresses means that the global banking system will likely turn inward and the process of cross-border savings intermediation could slow substantially in the year ahead. This is yet another hurdle for global growth.

 

A second component of de-globalization is the glacial but observable increase in trade skirmishes between the U.S. and China. There have been a series of tit-for-tat tariff increases lately, and the U.S. political machine has begun to increase calls for a more transparent and open Chinese economy only to be summarily rebuffed by Chinese officials. This glacial trend is an important one to watch, as trade between U.S. and China has been a very important source of strength for large portions of the global economy.

 

Finally, the cyclical outlook would not be complete without a mention of MF Global and the implications thereof on financial re-regulation.  We have long suggested that the developed world financial system has begun a gradual  process of returning to "utility banking,” a boring destination where the financial system largely separates deposit taking and loan making from the riskier endeavors of leveraged finance and asset price speculation. MF Global is likely to spark an acceleration in this process, only because it has shown that the regulatory changes planned (and yet to be fully implemented) after the collapse of Lehman Brothers in 2008 have done little to protect investors from concentrated financial system risks. We expect to see changes in the regulatory architecture of capital markets that may reduce system-wide liquidity, increase financial transaction costs and de-risk balance sheets even further. Think of this as an incremental source of friction to global growth in the year ahead.

 

In sum, we expect the global economy to grow by 1% to 1.5% in 2012. This is significantly slower than the 2.5% growth rate achieved in 2011 and the 4.1% rate achieved in 2010.  The risks to this forecast lay to the downside, which speaks to the question of inflation expectations.  We expect global inflation to slow to 2% in 2012 from 3.1% in 2011.

Standard and Poor's aiming to downgrade World and themselves..?

Standard & Poor's may downgrade the triple-A ratings of six European nations including Germany, according to the Financial Times in its online edition Monday. 


The ratings agency will review the triple-A ratings of Germany, France, the Netherlands, Austria, Finland, and Luxembourg, and lower them to a AA+ if reviewers are not convinced that European policymakers are making enough progress to justify the ratings, FT reported. 


S&P is expected to release its announcement of the review later Monday


It seems with this action there will be a time when every thing and all is degraded by Standard and Poor's will downgrade to the Sub prime category. Is it sensationalism, unrealism and Selling Fear. 
It seems there are many buyers of Fear now than Greed. 
What is Sold that is Made..! 

Global PMI dips below 50 : Markit

At 49.9 in September, down from 50.2 in August, the JPMorgan
Global Manufacturing  PMI™ posted below the neutral 50.0
mark for the first time since June 2009.
The per formance of   the global  manufactur ing sector  has
weakened noticeably since the start of the year. Over Q3 2011
as a whole, production growth was negligible and down sharply
f rom Q1's  recent  peak.   Incoming new work,  meanwhi le,
contracted for the first time since Q2 2009.
September saw new orders contract at the fastest pace 28
months, meaning that manufacturers depleted backlogs of
work to the greatest extent in almost two-and-a-half years just
to hold production steady at its August level. International trade
flows have also fallen in recent months.
September saw production expand in the US and the UK,
following slight reductions in August. China reported a further
slight expansion, while growth in India slowed sharply to its
weakest in the current two-and-a-half year period of increase.
Output declined in the Eurozone, Japan and Brazil.
The level of incoming new work fell for the third consecutive
month  in September.  Among  the major   indust r ial  nat ions
covered by the survey, new orders declined in the US, the
Eurozone, China, and Japan. All of the euro area member
states for which data are collected saw a contraction.
New export orders declined for the second successive month
in September. Reductions were seen in the Eurozone (steepest
since June 2009), Japan (fastest for five months), China, the
UK and Brazil (both the most marked since May 2009), India,
Russia, Taiwan, Poland and Australia. Within the euro area,
all nations reported lower levels of new export business. In
contrast, the US saw growth in foreign demand improve from
August's two-year low. Canada, the Czech Republic and Turkey
also reported increases.
Manufacturing employment increased for the twenty-second
straight month in September. However, the average rate of
jobs growth over Q3 2011 was the least marked since the final
quarter of 2009. The latest survey period saw staffing levels
increase in the US, the Eurozone (but driven almost entirely by
Germany), Japan, Canada, Eastern Europe, Switzerland,
Taiwan and Turkey. Job losses were seen China, the UK, India,
Russia, Brazil, South Africa and Australia.
September saw average input prices rise at the same pace
as August's 13-month low. Cost inflation continued to ease in
developed markets, whereas emerging nations saw input
prices rise at the fastest pace in four months.

Europe, FED and Bernanke to lean over Market

Tuesday

In the UK, the BRC Retail Sales Monitor will be published, and
signal the latest trading conditions on the high street.
China releases the latest batch of inflation data for August, including
the consumer price (CPI) and producer price indexes (PPI).
CPI registered 6.5% in July, despite numerous attempts by the government
to cool inflationary pressures.
The Eurozone sees the revised estimate of gross domestic product (GDP) for Q2.
Currently, the preliminary figure puts quarter-on-quarter growth at
0.2%. Industrial orders for Germany, meanwhile, will also be released on Tuesday

The closely watched ISM non-manufacturing PMI survey is
published on Tuesday,

Wednesday

The KPMG/REC Report on Jobs is published on Wednesday,
providing insight into UK labour market conditions.
Official industrial production data for July will also be
published on Wednesday in Germany and the UK

Across the Atlantic, weekly data for mortgage applications
and store sales will reflect the current consumer attitude in
the US. Also, the Federal Reserve Beige Book that provides
anecdotal evidence alongside current economic data will be
released ahead of the FOMC conference held later in
September.
Wednesday concludes with the Bank of Canada announcing
their interest rate decision, as well as the IVEY PMI
indicating the direction of Canadian economic growth.
Canadian GDP contracted 0.1% during the second quarter.


Thursday
The main highlight of Thursday revolves around monetary
policy announcements in the Eurozone, UK and US. Notably,
Chairman Bernanke will deliver a speech at the Economic
Club in Minnesota that will provide further insight into the
future policy stance of the Fed and whether this includes
QE3.
The publication of trade balances across the Eurozone will
identify the extent of an export-led recovery in the euro area.
This is particularly the case for Germany, where exports
have been key to its economic recovery. In June, German

exports fell 1.2% compared with May, and are expected to
fall further according to a recent Reuters’ poll.
Other notable releases are international trade, initial
jobless claims and consumer credit data for the US.

Friday
The week draws to a close with both Japan and Italy
releasing latest estimates for Q2 GDP. Moreover, inflation
data in the UK and Germany will be published, while France
releases industrial production data for July. Details
surrounding the French government budget will also be
released and signal the effects of recent austerity measures

Flash PMI China Falls, Europe stumbles

Flash PMI™ survey data released today showed Chinese manufacturing production falling for the second successive month during August. However, the rate of decline in factory output eased compared with July, with the PMI Output Index climbing from 48.0 to 49.4. 
The easing in growth was not broad-based, however, with differing performance by company size. The slower contraction of production reflected renewed growth at smaller manufacturers, where production rose for the first time in three months. 


In contrast, large firms recorded the sharpest decline in output for 15 months. 


This represents a turnaround compared to earlier in the year, when larger companies had generally outperformed smaller firms.




Euro Zone Resilient or Stagnates..? 

The Markit Flash Eurozone PMI Composite Output Index, based on around 85% of usual monthly replies, was unchanged at 51.1 in August. 


The latest reading signalled a rate of increase identical to July’s twenty-two month low and a further near-stagnation of private sector output.

Flash PMI from Markit Release dates

22 Aug 00:01 21 Aug 23:01 22 Aug 00:01 London UK Household Finance Index - tim.moore@markit.com
23 Aug 03:30 23 Aug 02:30 23 Aug 10:30 Beijing Flash China Manufacturing PMI HSBC alex.hamilton@markit.com
23 Aug 08:00 23 Aug 07:00 23 Aug 09:00 CEST * Flash France PMI - jack.kennedy@markit.com
23 Aug 08:30 23 Aug 07:30 23 Aug 09:30 CEST * Flash Germany PMI - tim.moore@markit.com
23 Aug 09:00 23 Aug 08:00 23 Aug 10:00 CEST * Flash Eurozone PMI - chris.williamson@markit.com
30 Aug 09:00 30 Aug 08:00 30 Aug 10:00 CEST Austria Manufacturing PMI Bank Austria andrew.harker@markit.com
30 Aug 09:10 30 Aug 08:10 30 Aug 10:10 CEST Germany Retail PMI - tim.moore@markit.com
30 Aug 09:10 30 Aug 08:10 30 Aug 10:10 CEST France Retail PMI - jack.kennedy@markit.com
30 Aug 09:10 30 Aug 08:10 30 Aug 10:10 CEST Italy Retail PMI - phil.smith@markit.com
30 Aug 09:10 30 Aug 08:10 30 Aug 10:10 CEST Eurozone Retail PMI - trevor.balchin@markit.com
31 Aug 00:15 30 Aug 23:15 31 Aug 08:15 Tokyo Japan Manufacturing PMI JMMA alex.hamilton@markit.com

The ECB Statement : End of Choices and Sucks

7 August 2011 - Statement by the President of the ECB

1. The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.

2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.

3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.

4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.

5. It equally considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational.

6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in Euro Area

The Voice that spooked the Market in Sell Off: ECB statement

Jean-Claude Trichet, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 4 August 2011

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will report on the outcome of today’s meeting of the Governing Council, which was also attended by Commissioner Rehn.

Based on its regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged, following the 25 basis point increase on 7 July 2011. The information that has become available since then confirms our assessment that an adjustment of the accommodative monetary policy stance was warranted in the light of upside risks to price stability. While the monetary analysis indicates that the underlying pace of monetary expansion is still moderate, monetary liquidity remains ample and may facilitate the accommodation of price pressures. As expected, recent economic data indicate a deceleration in the pace of economic growth in the past few months, following the strong growth rate in the first quarter. Continued moderate expansion is expected in the period ahead. However, uncertainty is particularly high. For monetary policy, it is essential that recent price developments do not give rise to broad-based inflationary pressures. Inflation expectations in the euro area must remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth and job creation in the euro area. At the same time, short-term interest rates remain low and financing conditions are favourable. Thus, our monetary policy stance remains accommodative. We will continue to monitor very closely all developments with respect to upside risks to price stability.

Given the renewed tensions in some financial markets in the euro area, the Governing Council today also decided to conduct a liquidity-providing supplementary longer-term refinancing operation (LTRO) with a maturity of approximately six months. The operation will be conducted as a fixed rate tender procedure with full allotment. The rate in this operation will be fixed at the average rate of the main refinancing operations (MROs) over the life of the supplementary LTRO. The operation will be announced on 9 August 2011, with allotment on 10 August 2011 and settlement on 11 August 2011, and will mature on 1 March 2012.

The Governing Council also decided to continue conducting its MROs as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last maintenance period of 2011 on 17 January 2012. This procedure will also remain in use for the Eurosystem’s special-term refinancing operations with a maturity of one maintenance period, which will continue to be conducted for as long as needed, and at least until the end of the last quarter of 2011. The fixed rate in these special-term refinancing operations will be the same as the MRO rate prevailing at the time.

Furthermore, the Governing Council has decided to conduct the three-month LTROs to be allotted on 26 October, 30 November and 21 December 2011 as fixed rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO.

Let me now explain our assessment in greater detail, starting with the economic analysis. In the first quarter of 2011 euro area real GDP posted a strong quarter-on-quarter increase of 0.8%. Data and survey releases for the second quarter point towards ongoing real GDP growth, albeit, as expected, at a slower pace. This moderation also reflects the fact that the strong growth in the first quarter was in part due to special factors. The underlying positive momentum of economic growth in the euro area remains in place and continued moderate expansion is expected in the period ahead. Euro area exports should continue to be supported by the ongoing expansion in the world economy. In addition, the present level of consumer and business confidence in the euro area supports private sector domestic demand. However, growth dynamics are currently weakened by a number of factors contributing to uncertainty, and activity is expected to be dampened somewhat by the ongoing process of balance sheet adjustment in various regions and sectors.

In the Governing Council’s assessment, the risks to this economic outlook for the euro area remain broadly balanced in an environment of particularly high uncertainty. On the one hand, consumer and business confidence, together with improvements in labour market conditions, could continue to provide support to domestic economic activity. On the other hand, downside risks may have intensified. They relate to the ongoing tensions in some segments of the euro area financial markets as well as to global developments, and the potential for these pressures to spill over into the euro area real economy. Downside risks also relate to further increases in energy prices, protectionist pressures and the possibility of a disorderly correction of global imbalances.

With regard to price developments, euro area annual HICP inflation was 2.5% in July 2011, following 2.7% in June. The relatively high inflation rates seen over the past few months largely reflect higher energy and other commodity prices. Looking ahead, inflation rates are likely to stay clearly above 2% over the coming months. Upward pressure on inflation, mainly from energy and other commodity prices, is also still discernible in the earlier stages of the production process. It remains of paramount importance that the rise in HICP inflation does not translate into second-round effects in price and wage-setting behaviour and lead to broad-based inflationary pressures. Inflation expectations must remain firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to, 2% over the medium term.

Risks to the medium-term outlook for price developments remain on the upside. They relate, in particular, to higher than assumed increases in energy prices. Furthermore, there is a risk of increases in indirect taxes and administered prices that may be greater than currently assumed, owing to the need for fiscal consolidation in the coming years. Finally, upside risks may stem from stronger than expected domestic price pressures in the euro area.

Turning to the monetary analysis, the annual growth rate of M3 decreased to 2.1% in June 2011, from 2.5% in May. Looking through the recent monthly volatility, M3 growth has broadly stabilised over recent months, after edging up until the first quarter of 2011. The annual growth rate of loans to the private sector declined to 2.5% in June, from 2.7% in May. Overall, the underlying pace of monetary expansion remains moderate. At the same time, monetary liquidity accumulated prior to the period of financial market tensions continues to be ample, and may facilitate the accommodation of price pressures in the euro area.

Looking at M3 components, the annual growth rate of M1 remained unchanged at 1.2%, whereas growth in other short-term deposits declined to 3.7%. The growth differentials continue to reflect in part the gradual increase in the remuneration of short-term time and savings deposits over recent months. At the same time, the still relatively steep yield curve implies a dampening impact on overall M3 growth, as it reduces the attractiveness of monetary assets compared with more highly remunerated longer-term instruments outside M3. However, this impact is likely to be waning. On the counterpart side, the annual growth of loans to non-financial corporations continued to edge up, from 0.9% in May to 1.5% in June, whereas the annual growth of loans to households hovered over recent months around rates of slightly above 3%.

The overall size of MFI balance sheets has remained broadly unchanged over recent months. Where it is necessary to provide adequate scope to expand the provision of credit to the private sector, it is essential for banks to retain earnings, to turn to the market to strengthen further their capital bases or to take full advantage of government support measures for recapitalisation. In particular, banks that currently have limited access to market financing urgently need to increase their capital and their efficiency. In this respect, we welcome the EU-wide stress-testing exercise, which was prepared by the European Banking Authority and national supervisors, in close cooperation with the ECB. We also welcome the commitment made by national authorities with regard to the provision of support facilities for banks where private sector means are insufficient.

To sum up, based on its regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged, following the 25 basis point increase on 7 July 2011. The information that has become available since then confirms our assessment that an adjustment of the accommodative monetary policy stance was warranted in the light of upside risks to price stability. A cross-check with the signals coming from the monetary analysis indicates that while the underlying pace of monetary expansion is still moderate, monetary liquidity remains ample and may facilitate the accommodation of price pressures. As expected, recent economic data indicate a deceleration in the pace of economic growth in the past few months, following the strong growth rate in the first quarter. Continued moderate expansion is expected in the period ahead. However, uncertainty is particularly high. For monetary policy, it is essential that recent price developments do not give rise to broad-based inflationary pressures. Inflation expectations in the euro area must remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting economic growth and job creation in the euro area. At the same time, short-term interest rates remain low and financing conditions favourable. Thus, our monetary policy stance remains accommodative. We will continue to monitor very closely all developments with respect to upside risks to price stability.

Next Week..? relief Rally in offing..? International data

A vary few hours from now P.M.I. of China will be out, shaking the hang over over, of last week. The Debt deal and US politicians got the highest T.R.P. and may continue next week. The good Employment data and excellent reports were shrugged off. The premier currency nose dived and international confidence is shaken of course not yet stirred.
                     The Calendar below shows the International data list for lack of time. Manufacturing Indices, M.V. Sales and US Employment Report shall take the stage and US Budget may enlightening new realities.

Date	Time GMT		Event	Importance	Actual	Forecast	Previous	Notes
Sun Jul 31	23:01		GBP Lloyds Business Barometer (JUL)	Low			36
	23:30		AUD AiG Performance of Manufacturing Index (JUL)	Medium			52.9
Mon Aug 1			JPY Official Reserve Assets (JUL)	Low			$1137.8B
			GBP Halifax Plc House Prices s.a. (MoM) (JUL)	Low		0.0%	1.2%
			GBP Halifax House Price (3MoY) (JUL)	Low		-2.8%	-3.5%
	01:00		NZD ANZ Commodity Price (JUL)	Low			-1.2%
	01:00		CNY PMI Manufacturing (JUL)	High		50.2	50.9
	01:00		AUD HIA New Home Sales (MoM) (JUN)	Medium			-0.2%
	02:30		CNY HSBC Manufacturing PMI (JUL)	Low			50.1
	05:00		JPY Vehicle Sales (YoY) (JUL)	Low			-23.3%
	07:45		EUR Italian Purchasing Manager Index Manufacturing (JUL)	Low		49.0	49.9
	07:50		EUR French Purchasing Manager Index Manufacturing (JUL F)	Low		50.1	50.1
	07:55		EUR German Purchasing Manager Index Manufacturing (JUL F)	Medium		52.1	52.1
	08:00		EUR Italian Unemployment Rate (SA) (JUN P)	Low			8.1%
	08:00		EUR Euro-Zone Purchasing Manager Index Manufacturing (JUL F)	Medium		50.4	50.4
	08:30 LIVE		GBP Purchasing Manager Index Manufacturing (JUL)	Medium		51.0	51.3
	09:00		EUR Euro-Zone Unemployment Rate (JUN)	Medium		9.9%	9.9%
	14:00		USD Construction Spending (MoM) (JUN)	Medium		-0.1%	-0.6%
	14:00		USD ISM Manufacturing (JUL)	High		55.0	55.3
	14:00		USD ISM Prices Paid (JUL)	Medium		64.0	68.0
	16:00		EUR Italian New Car Registrations (YoY) (JUL)	Low			-1.7%
	17:00		EUR Italian Budget Balance (euros) (JUL)	Low			1.3B
	17:00		EUR Italian Budget Balance (euros) (YTD) (JUL)	Low			-43.5B
	22:45		NZD Average Hourly Earnings (QoQ) (2Q)	Medium		0.8%	0.3%
	22:45		NZD Private Wages ex Overtime (QoQ) (2Q)	Low		0.5%	0.4%
	22:45		NZD Labor Cost Private Sector (QoQ) (2Q)	Low
	23:50		JPY Monetary Base (YoY) (JUL)	Low			17.0%
Tue Aug 2	01:30		AUD House Price Index (QoQ) (2Q)	Medium		-1.0%	-1.7%
	01:30		AUD House Price Index (YoY) (2Q)	Medium		-3.0%	-0.2%
	01:30		JPY Labor Cash Earnings (YoY) (JUN)	Medium		0.4%	1.0%
	01:30		AUD Building Approvals (MoM) (JUN)	Low		3.0%	-7.9%
	01:30		AUD Building Approvals (YoY) (JUN)	Low		-10.3%	-14.4%
	04:30 LIVE		AUD Reserve Bank of Australia Rate Decision	High		4.75%	4.75%
	06:30		AUD RBA Commodity Price Index (JUL)	Low			109.4
	06:30		AUD RBA Commodity Index SDR (YoY) (JUL)	Low			28.2%
	07:15		CHF Retail Sales (Real) (YoY) (JUN)	Medium			-4.1%
	07:30		CHF SVME-Purchasing Managers Index (JUL)	Medium		52.5	53.4
	08:30		GBP Purchasing Manager Index Construction (JUL)	Medium		53.1	53.6
	09:00		EUR Euro-Zone Producer Price Index (MoM) (JUN)	Medium		0.1%	-0.2%
	09:00		EUR Euro-Zone Producer Price Index (YoY) (JUN)	High		5.9%	6.2%
	12:30		USD Annual Revisions: Personal Income and Spending	Low
	12:30		USD Personal Income (JUN)	Medium		0.2%	0.3%
	12:30		USD Personal Spending (JUN)	Medium		0.2%	0.0%
	12:30		USD Personal Consumption Expenditure Deflator (YoY) (JUN)	Low			2.5%
	12:30		USD Personal Consumption Expenditure Core (MoM) (JUN)	Medium		0.2%	0.3%
	12:30		USD Personal Consumption Expenditure Core (YoY) (JUN)	Low		1.4%	1.2%
	21:00		USD Total Vehicle Sales (JUL)	Low		11.85M	11.41M
	21:00		USD Domestic Vehicle Sales (JUL)	Low		9.30M	8.95M
	23:01		GBP BRC Shop Price Index (YoY) (JUL)	Low			2.9%
	23:30		AUD AiG Performance of Service Index (JUL)	Medium			48.5
Wed Aug 3	01:00		CNY China Non-manufacturing PMI (JUL)	Medium			57
	01:30		AUD Retail Sales s.a. (MoM) (JUN)	Medium		0.4%	-0.6%
	01:30		AUD Trade Balance (Australian dollar) (JUN)	Medium		2200M	2333M
	02:30		CNY China HSBC Services PMI (JUL)	Low			54.1
	06:00		CHF UBS Real Estate Bubble Index (2Q)	Low			0.63
	06:30		AUD Foreign Reserves (Australian dollar) (JUL)	Low			A$41.1B
	07:15		EUR French Purchasing Manager Index Services (JUL F)	Low		54.2	54.2
	07:45		EUR Italian Purchasing Manager Index Services (JUL)	Low			47.4
	07:55		EUR German Purchasing Manager Index Services (JUL F)	Medium		52.9	52.9
	08:00		EUR Euro-Zone Purchasing Manager Index Composite (JUL F)	Medium		50.8	50.8
	08:00		EUR Euro-Zone Purchasing Manager Index Services (JUL F)	Medium		51.4	51.4
	08:30		GBP Purchasing Manager Index Services (JUL)	Medium		53.2	53.9
	08:30		GBP Official Reserves (Changes) (JUL)	Low			-$148M
	09:00		EUR Euro-Zone Retail Sales (MoM) (JUN)	Medium		0.5%	-1.0%
	09:00		EUR Euro-Zone Retail Sales (YoY) (JUN)	High		-1.0%	-1.8%
	11:00		USD MBA Mortgage Applications	Low			-5.0%
	11:30		USD Challenger Job Cuts (YoY) (JUL)	Low			5.3%
	12:15		USD ADP Employment Change (JUL)	Medium		100K	157K
	14:00 LIVE		USD ISM Non-Manufacutring Composite (JUL)	Medium		53.8	53.3
	14:00		USD Factory Orders (JUN)	Medium		-0.5%	0.8%
	14:30		USD DOE U.S. Crude Oil Inventories	Low			2296K
	14:30		USD DOE Cushing OK Crude Inventory	Low			430K
	14:30		USD DOE U.S. Distillate Inventory	Low			3385K
	14:30		USD DOE U.S. Gasoline Inventories	Low			1022K
	14:30		USD DOE U.S. Refinery Utilization	Low			-2.00%
	22:45		NZD Participation Rate (QoQ) (2Q)	Low		68.4%	68.7%
	22:45		NZD Employment Change (QoQ) (2Q)	Medium		0.0%	1.4%
	22:45		NZD Unemployment Rate (2Q)	Medium		6.5%	6.6%
	22:45		NZD Employment Change (YoY) (2Q)	Medium		2.0%	1.8%
Thu Aug 4	04:00		USD ICSC Chain Store Sales YoY (JUL)	Medium			6.9%
	04:00		GBP New Car Registrations (YoY) (JUL)	Low			-6.2%
	04:00		JPY Bank of Japan Rate Decision	High			0.10%
	04:00		JPY Tokyo Avg Office Vacancies (%) (JUL)	Low			8.81
	10:00		EUR German Factory Orders s.a. (MoM) (JUN)	Medium		-0.2%	1.8%
	10:00		EUR German Factory Orders n.s.a. (YoY) (JUN)	Medium		6.8%	12.2%
	11:00		GBP BOE Asset Purchase Target (AUG)	High		200B	200B
	11:00		GBP Bank of England Rate Decision	High		0.50%	0.50%
	11:45 LIVE		EUR European Central Bank Rate Decision	High		1.50%	1.50%
	12:00		USD RBC Consumer Outlook Index (AUG)	Low			43.7
	12:30		USD Initial Jobless Claims	Low		406K	398K
	12:30		USD Continuing Claims	Low			3703K
	13:45		USD Bloomberg Consumer Comfort (JUL 31)	Low			-46.8
	14:30		USD EIA Natural Gas Storage Change	Low			43
	23:01		GBP Lloyds Employment Confidence (JUL)	Medium			-50
	23:30		AUD AiG Performance of Construction Index (JUL)	Medium			35.8
Fri Aug 5	05:00		JPY Coincident Index (JUN P)	Low		108.7	106.3
	05:00		JPY Leading Index (JUN P)	Medium		103.4	99.6
	06:45		EUR French Trade Balance (euros) (JUN)	Low		-6500M	-7422M
	07:00		CHF Foreign Currency Reserves (JUL)	Low			196.0B
	07:15		CHF Consumer Price Index (MoM) (JUL)	Medium		-0.6%	-0.2%
	07:15		CHF Consumer Price Index (YoY) (JUL)	Medium		0.7%	0.6%
	07:15		CHF CPI - EU Harmonised (MoM) (JUL)	Medium			0.0%
	07:15		CHF CPI - EU Harmonised (YoY) (JUL)	Medium			0.6%
	08:00		EUR Italian Industrial Production s.a. (MoM) (JUN)	Low		0.2%	-0.6%
	08:00		EUR Italian Industrial Production w.d.a. (YoY) (JUN)	Low		1.8%	1.8%
	08:00		EUR Italian Industrial Production n.s.a. (YoY) (JUN)	Low			4.9%
	08:30		GBP Producer Price Index Input n.s.a. (MoM) (JUL)	Low		0.7%	0.4%
	08:30		GBP Producer Price Index Input n.s.a. (YoY) (JUL)	Low		18.7%	17.0%
	08:30		GBP Producer Price Index Output n.s.a. (MoM) (JUL)	Low		0.2%	0.1%
	08:30		GBP Producer Price Index Output n.s.a. (YoY) (JUL)	Medium		5.8%	5.7%
	08:30		GBP Producer Price Index Output Core n.s.a. (MoM) (JUL)	Low		0.2%	0.2%
	08:30		GBP Producer Price Index Output Core n.s.a. (YoY) (JUL)	Medium		3.2%	3.2%
	09:00		EUR Italian Gross Domestic Product s.a. and w.d.a. (QoQ)	Low		0.3%	0.1%
	09:00		EUR Italian Gross Domestic Product s.a. and w.d.a. (YoY)	Low		0.8%	1.0%
	10:00		EUR German Industrial Production s.a. (MoM) (JUN)	Medium		0.0%	1.2%
	10:00		EUR German Industrial Production n.s.a. and w.d.a. (YoY) (JUN)	Medium		8.1%	7.6%
	11:00 LIVE		CAD Unemployment Rate (JUL)	High		7.4%	7.4%
	11:00 LIVE		CAD Net Change in Employment (JUL)	High		20.0K	28.4K
	11:00		CAD Full Time Employment Change (JUL)	Medium			7.3
	11:00		CAD Part Time Employment Change (JUL)	Medium			21.1
	11:00 LIVE		CAD Participation Rate (JUL)	Medium			66.9
	12:30		CAD Building Permits (MoM) (JUN)	Low		-5.0%	20.9%
	12:30 LIVE		USD Change in Non-farm Payrolls (JUL)	High		98K	18K
	12:30		USD Change in Private Payrolls (JUL)	Medium		123K	57K
	12:30		USD Change in Manufacturing Payrolls (JUL)	Low		10K	6K
	12:30		USD Unemployment Rate (JUL)	High		9.2%	9.2%
	12:30		USD Avg Hourly Earnings (MoM) (JUL)	Medium		0.2%	0.0%
	12:30		USD Avg Hourly Earnings (YoY) (JUL)	Medium		1.9%	1.9%
	12:30		USD Avg Weekly Hours All Employees (JUL)	Low		34.3	34.3
	12:30		USD Change in Household Survey Employment (JUL)	Low			-445
	14:00		CAD Ivey Purchasing Managers Index (JUL)	Medium		64.6	68.2
	14:00		CAD Ivey Purchasing Managers Index s.a. (JUL)	Medium		62.9	59.9
	19:00		USD Consumer Credit (JUN)	Medium