Eurozone confidence rising as deflationary fears eases

While searching on the eurozone producer price index (PPI) data for this year, wanted a take on inflation between January and now, I saw this article on investing.com: 3 numbers, eurozone confidence rising ... Reasons why eurozone confidence is on the upswing:

1. Rebound in energy production in France might increase its GDP by 0.4%. 
2. Forecasted rise in European quarter-over-quarter GDP growth for Q1 and Q2. 
3. Investor confidence, as measured by the Sentix Investor Confidence Index is on the rise. 
4. Eurozone composite Purchasing Managers' Index, also an indicator of manufacturing confidence, is on the rise. 

Meanwhile deflationary fears have been eased. Eurozone CPI, a relative measure of inflation that indices the prices of goods purchased by consumers, inched upwards from -0.3% in February to -0.1% in March. 

source: tradingeconomics.com

Macro reports are looking good for the Eurozone in the short term.

If America doesn’t want more power, no country is more willing to take it away than… you guessed right!

The Economic Power Button?

Credit: Frédéric BISSON on flickr.

Speculation is rife that the Federal Reserve’s policy meeting tomorrow will occasion the announcement of a rise in interest rates. It’s not speculation because reading today’s news points to that fact.

First, the dollar is very strong and will get stronger. The real exchange rate, not just the nominal one, is also high, propped up by falling oil prices and a weak inflation in the country.

Second, the quantitative easing regime which the European Central bank just kicked in last week will make European corporate stocks very attractive. If the Fed doesn’t raise interest rates soon, investors might push their money towards Europe and they’ll be the loser for it if the euro appreciates in the near future.

As I mentioned before, falling oil prices means the cost of production is falling globally. Too bad for OPEC countries! Profits will soar and there will be more money in the hands of American citizens. Employment is not a big issue; it’s a political advantage for President Obama.

Take a happy workforce with money in their pockets, corporations posting profits and a financial system that is one of the best in the largest economy in the world and there’s only one way to go – hold on to that power.

Holding off raising interest rates might seem a strategic option, but that option will leave Americans with no option but to import goods and more foreign goods. They’d rather export financial assets and make the balance sheets cleaner. On the other hand, raising rates makes American citizens stronger and corporations more competitive.

So, which way would the Fed go: take a hawkish tone and watch as the markets unfold post Eurozone’s quantitative easing, or take the plunge, do what the markets expect? It could be any one’s guess.

Why negative interest rates might not seem scary after all!

Why would anyone want to deposit or invest his money when nominal interest rates are negative?

Would you prefer to hold cash, like the Argentine currency above, or keep your account when rates are negative?

Photo Credit: Alex E. Proimos via Compfight cc

For years, economists have dubbed imposition of negative interest rates as “a tax on holding money.” No one cherishes losing money. Under a negative nominal interest rate of -2.0%, $100 in an account will be worth $98 a year's time.

Negative nominal and real interest rates have been part of monetary history.

When inflation and bank charges on your checking accounts are accounted for, your money might eventually turn out to be under a negative nominal returns regime. Zero interest rates, which most persons tend to accept, turn out to be real negative interest rates. Other reasons why you might not realize you are already accepting negative interest rates, according to an article by Nouriel Roubini are:

• Banks having excess cash reserves will have no option but to accept negative interest rates.
• In Switzerland and Denmark where the capital gains are large compared to the price to pay for negative rates, negative interest rates have been allowed to exist.
• If the Eurozone encounters a deflation, then the negative nominal interest rates become positive real rates of return.

Yet, many would cringe at the prospect of losing money in the bank. Negative rates are attractive to many countries especially when the economy is in a downturn. One, it reduces savings because the opportunity cost of savings, consumption, has become higher. Boosting consumption will jumpstart growth and induce positive inflation. Central banks and banks will impose negative interest rates to try to stabilize the economy.

This implies that countries that impose negative interest rates should be launching projects or investments that offer alternatives to bank checking accounts and deposits especially productive infrastructure projects before people run the risk of saturating themselves with cash. Thomas Hirst thinks banks might be hardest hit. They might have to endure reduced profits or raise the interest rates on their loans.

The potential for a storm is evident. The ECB is aware of this. So, why should investors worry when the Swedish and eurozone experiment hasn’t failed?