The improvement in Europe’s financial markets has not yet been reflected in the real economy.
Economic data regarding the Eurozone continues pointing to the recession prevailing in the continent, and expectation surveys indicate the further contraction expected.
However, the deterioration recorded in these surveys has recently stopped, along with the sharp decline in the probability for the Eurozone’s dissolution.
The essentials of the data published were the following:
- The Eurozone unemployment rate continues to soar to new heights and rose in December to a rate of 11.8%.
- A sharp decline in German exports and imports in November (-3.7% and -3.4% respectively).
- A second consecutive monthly increase in the Eurozone’s Economic Sentiment index. We’ll note that the low level still indicates the expectation for further deterioration of the European economy.
Despite the recession, the debt yield of peripheral countries continued to fall sharply.
The ten-year bonds yields in Spain and Italy fell by about 17 basis points and 13 basis points respectively.
The ten-year bond yield in Spain fell this week to below the 5% threshold for the first time since March 2012.
Among the reasons which supported further yield declines we note the Japanese finance minister’s message that Japan will start buying European bonds (which will be issued by the ESM, European Stability Mechanism) and other Euro denominated sovereign debt, as part of the new government’s strategy to weaken the Japanese yen while supporting the European economy.
Last Thursday, during the press conference following the rate decision, chairman of the ECB, Mario Draghi, said that the decision to leave the interest rate unchanged was received unanimous, as opposed to the differences that arose among the members of the committee in the previous interest rate decision, that the debt crisis continues to subside, and that the deterioration reflected in the leading indicators has stopped.
Draghi noted that the positive developments in the financial markets are not yet reflected in the real economy, and that the growth forecast’s risk is that it still tends to the downside.
We note that towards the weekend the Euro strengthened (against the dollar) in light of the decline in the probability for an interest rate cut in the Eurozone in the coming months.