by Edward Hugh: Barcelona

The contraction in global services activity also seems to be easing up, following the pattern displayed by the manufacturing sector, and the JPMorgan Global Services Business Activity Index rose for the second month running in April, registering at 43.8 its highest level since last September. It is important to keep clearly in mind, however, that the headline index remained well below the critical dividing line of 50 which separates growth from contraction, and thus we are still firmly within global recession territory. So stabilistation in the contraction is not the same thing as recovery.

The JPMorgan Global Serices Report is based on the results of surveys covering around 3,500 executives in countries which taken together account for an estimated 60% of global service sector output.

Measured overall, worldwide services activity fell for the eleventh month running. Lower levels of activity were reported across all of the nations for which April PMI data were available. Rates of decline did however ease to their weakest in the current seven month period of decline in the US, to a six-month low in the Eurozone and to their weakest for seven and eight-months respectively in Japan and the UK. Only Ireland reported a faster drop in activity than during March.

Global services employment however continued to give cause for concern and declined for the twelfth month running in April. The US saw a severe reduction, albeit at a noticeably slower pace than in March. Japan cut jobs at the weakest rate of all the nations covered. The UK, Russia and Australia reported slower declines, whereas the rate of job loss in the euro area hit a series record. Deflationary pressures were evident, and average input costs declined for the sixth successive month in April. The sharpest reductions in costs were signalled for Ireland and the US. Input prices in the Eurozone fell at the fastest pace in the series history, but slower than the global average. The UK and Russia reported higher costs in April.

The JPMorgan data is also backed by the results of the twice-yearly survey of service sector sentiment published by Markit Economics this week. The survey is carried out in the same companies as are sampled for the monthly purchasingmanagers' indices, and showed thatcompanies in European and emerging markets services sector havenow recovered much of the confidence lost at the start of the global recession.

The majority of companies report that they expect the volume of business to improve over the coming year, with revenues growing and new orders rising. There are however important differences, since while greater optimism is evident in the Bric countries of Brazil, Russia, India and China, some European economies have notably failed to rebound, with Germany standing out as a centre of gloom at the moment, with many German companies continuing to suffer major doubts that their business outlook will improve.

Across Europe in general, 39.5 percent of service providers stated they expect their volume of business to improve over the year ahead with 21.5 percent forecasting a decline. Thus there is a positive balance of +18. This balance is far higher than the -2.9 figure recorded last October, though it is not yet at the +30 level of a year ago when few companies saw a deep recession ahead.

In the Bric countries, on the other hand, the mood is even better. The balance of Brazilian companies expecting higher volumes of business was +60.4, higher than a year ago, and the steep declines in confidence earlier witnessed in Russia and India have now been reversed. The outlier here is the Chinese service sector, which is a little less optimistic than sixmonths ago, even if the outlook is still broadly optimistic. This may well suggest that earlier Chinese reactions where rather over optimistic, since the country’s export sector is still facing veryserious problems.

Eurozone

The Eurozone services PMI staged its biggest one-month rise since December 2001 as Markit unexpectedly revised up its services business activity index to 43.8 following the earlier flash reading of 43.1. Activity thus registered its slowest pace of contraction in six months in a sector which covers everything from financial services to airlines. The figure was well above the 40.9 registered in March, but still heavily in contraction territory. The rate of contraction did, however, slow in all four of the biggest euro zone countries even reaching the slowest rate of contraction in nearly a year in Spain.

The eurozone composite PMI, which includes both manufacturing and services, was also up strongly - to 41.1 from 38.3 in March. This was again the highest level since October, and suggested the rate of economic contraction in the second quarter of the year may be rather better than the 1.9 percent contraction rate expected by consensus estimates for the first three months of the year. The eurozone economy contracted at a 1.6 percent in the final months of 2008 and we may well be in for something similar in Q2.

The movement in the reading for services business expectations to 54.4 from 48.6 in March was the biggest one-month rise in this index since January 2002, and this is likely to further encourage optimists who expect the eurozone economy to start to grow again before the year is out, but really it would be very premature to draw any longer term forward looking projections at this point, especially given sensitivity in the index to seasonal factors like Easter and the weather.

Business expectations were generally up, and were the best in 15 months for Spain, and in 10 months in both Germany and France, while in Italy they hit an eight-month high. The report, however, did suggest that unemployment, which is already at 8.9 percent for the euro area as a whole (and 17.4 percent in Spain), is set to rise even further, with record rates of job cutting being reported across the entire euro area service sector.

All eurozone countries reported significant downward price pressures, and these are reflected in producer prices (which fell over 5% year on year in March, lead mainly by energy and commodities) and consumer price disinflation, where year on year price increases were only 0.6% in April, for the second month running.

Spain

Spanish service sector activity continued to decline in April although as elsewhere the rate was much slower than in previous months. The headline activity index stood at 42.5, still well below the critical 50 level indicating growth, but way above 34.1 in March and November’s record low of 28.2. April’s figure was in fact the highest recorded since May 2008 but nevertheless marked the 16th consecutive month of contraction as the deep recession weighed on new orders and jobs. According to Andrew Harker ,economist at Markit Economics, “Jobs continued to be lost at a fast pace, indicating that the labour market remains a key source of weakness.”

The survey showed staffing levels declined in April for the 14th month running as service providers cut jobs due to lower activity and to keep costs down. Hotel and restaurant firms were the hardest hit. However despite Spain’s deep and ongoing economic crisis, April’s survey was marked by confidence levels not seen in 15 months. Many of those surveyed by Markit said they believed the crisis would end within a year, with two-fifths of panellists expecting activity to be higher in 12 months and just 22 percent forecasting lower activity. However, companies remained relatively cautious about short term economic prospects.

The service sector thus is showing a significantly sharper rebound from the record declines of the last few months than is to be seen in the manufacturing sector, which continued to contract at a rapid pace in April.

Prices continue to fall, and services output prices registered the third-fastest decline in the survey’s history, second only to February and March this year, with those surveyed citing increased competition for new business and pressure from clients. Service providers also reported falls in input costs due to reduced labour costs and lower prices from suppliers, but, according to Markit, the decrease here was less marked than that for output prices.

Italy

Italian service sector activity contracted for the 17th consecutive month in April although at the slowest rate for six months. The Markit/ADACI Purchasing Managers’ Index rose to 42.0 from 39.1 in March, but still is not that far above the record low of 37.9 recorded in February. Activity has now been stick below the 50 mark that separates growth from contraction since November 2007.

The survey showed new business shrinking for the eighteenth straight month in April, though the rate of decline eased for the second month running, while expectations of business in a year’s time rose to an eight-month high. As elsewhere, while optimism is rising Markit did point to record job losses as a likely on consumer spending looking ahead, making hopes of a swift recovery extremely premature. The employment sub-index fell to 44.0 from 44.6, as firms cut jobs at a survey record rate in response to the ongoing loss of business. The survey is thus consistent with other recent indicators that have pointed to an economy still mired in the deep recession that began in spring of last year, but with some grounds for thinking that the lowest point may now have been passed. Consumer and business sentiment as measured by the ISAE institute both rose in April, and the manufacturing PMI showed activity shrinking at its slowest rate for six months after the index hit a record low in March.

Deflationary pressure remained evident with service firms cutting their prices for the seventh month running and at the fastest rate in the survey’s history in response to weak demand, while input prices showed no monthly increase for the first time since the survey began. The Italian government slashed its economic forecasts last week, and now project gross domestic product to fall by 4.2 percent this year following last year’s 1.0 percent decline. The International Monetary Fund is more pessimistic, forecasting a 4.4 percent fall this year and a further drop of 0.4 percent in 2010. Italy thus now possibly faces three years of economic contraction one after the other although previously the country had not posted two consecutive years of falling GDP in its entire post-war history.

Germany

Activity in Germany’s private sector shrank for the eighth month running in April, though as elsewhere the pace of the contraction eased, in the German case to the slowest rate since last October. The services sector PMI edged up to 43.8 from 42.3 in March, while the business expectations sub index jumped to 44.4 from 39.0, and the headline composite PMI reading rose to 40.1 from 38.3 in March.

Markit reported that “Pessimism about the year ahead outlook for activity was the least marked since June 2008. This partly reflected the support given to business sentiment from the government’s economic stimulus plans, as well as hopes that overall market conditions will begin to stabilise”. These firmer expectations are consistent with the rise in the April Ifo reading for German corporate sentiment, which hit its strongest level in five months.

However, despite the more positive business expectations, the German government has slashed its forecast for the economy, projecting a record 6-percent contraction this year. Previously it had not shrunk by more than 1 percent in any year since the second world war.

In harmony with this more sober assessment, the sub-index on employment fell to 40.6 from 42.3 in March. “We are now seeing the labour market feel the full force of the economic downturn, with the latest wave of private sector job losses the steepest for at least 11 years,” according to Tim Moore, economist at Markit Economics. “This provides advance warning that April’s spike in official unemployment numbers will be repeated during the months ahead … firms are likely to make further substantial job cuts even after the worst of the recession has passed,” he added. German unemployment rose for the sixth month running in April to hit its highest level since late 2007 despite government subsidies designed to prevent mass layoffs.

France

The contraction also eased in the French services sector in April, this time for a second successive month in April, and the Markit/CDAF final services PMI reached its highest level in six months at 46.5, up from 43.6 in March. The composite PMI also rose to 43.8 for the month, from a revised figure of 40.2 in March.

According to Markit panellists continued to report that overall operating conditions remained unfavourable and that falling new business had again negatively impacted on activity. New orders to service providers fell for the seventh consecutive month, with hotels and restaurants bearing the brunt of the downturn as customers cut back on discretionary spending. The business expectations index on the other hand climbed to 58.3 in April from 51.9 in March, and responses were more optimistic, with Markit reporting that 37 percent of respondents expected output to be higher in twelve months’ time.

In the short term, however, the picture was pretty similar to that seen elsewhere , with firms continuing to make painful adjustments to cope with a harsh economic environment, slashing prices to boost sales, and making further sweeping cuts to staffing levels. April’s output prices index showed prices falling for the eighth straight month, hitting a record low of 38.1, compared with the March reading of 38.4. The services employment index rose slightly to 41.0 from 40.8 in March, but still remained close to February’s survey record low of 40.6, indicating a further steep contraction in the service sector workforce, according to the Markit report.

Russia

Russia’s service industries contracted at the slowest pace in six months in April as business confidence improved, according to the monthly report from VTB Capital, with the PMI coming in at 44.4, compared with 43.9 in March.

While Russian services activity fell for the seventh consecutive month, it continued to rebound from December's record fall of 36.4. The rate of decline in new orders also eased for the third month in succession after registering a record contraction in January. Prices charged by companies declined for the first time since VTB started compiling the survey as providers competed by offering lower prices and discounts, according to the report. Input prices advanced at the slowest pace on record.

Russia's inflation rate fell slightly in April, dropping to 13.2 percent after rising to 14 percent in March, with consumer-price growth slowing to 0.7 percent month on month, according to the Federal Statistics Service. Retail sales were down an annual 4 percent in March, the biggest decrease since September 1999, as frozen credit markets and falling incomes forced Russians to curb spending, while GDP is now thought to have fallen 9.5% year on year in the first quarter of 2009.

United States

U.S. service-producing industries contracted again in April for the seventh straight month, but again the pace was slower than in March, according to the US Institute for Supply Management.

The ISM non-manufacturing index improved to 43.7% from 40.8% in March. This was the first increase since January. The index has now been below 50% since October, and touched its lowest level of 37.4% in November. Seven of 18 industries surveyed actually showed frowth in April, including real estate, entertainment, retail, and finance. The new orders index improved to 47.0% from 38.8%.

The employment index improved to 37% from 32.3%, indicating a slackening in the pace of job destruction.

by Edward Hugh: Barcelona

The contraction in global services activity also seems to be easing up, following the pattern displayed by the manufacturing sector, and the JPMorgan Global Services Business Activity Index rose for the second month running in April, registering at 43.8 its highest level since last September. It is important to keep clearly in mind, however, that the headline index remained well below the critical dividing line of 50 which separates growth from contraction, and thus we are still firmly within global recession territory. So stabilistation in the contraction is not the same thing as recovery.

The JPMorgan Global Serices Report is based on the results of surveys covering around 3,500 executives in countries which taken together account for an estimated 60% of global service sector output.

Measured overall, worldwide services activity fell for the eleventh month running. Lower levels of activity were reported across all of the nations for which April PMI data were available. Rates of decline did however ease to their weakest in the current seven month period of decline in the US, to a six-month low in the Eurozone and to their weakest for seven and eight-months respectively in Japan and the UK. Only Ireland reported a faster drop in activity than during March.

Global services employment however continued to give cause for concern and declined for the twelfth month running in April. The US saw a severe reduction, albeit at a noticeably slower pace than in March. Japan cut jobs at the weakest rate of all the nations covered. The UK, Russia and Australia reported slower declines, whereas the rate of job loss in the euro area hit a series record. Deflationary pressures were evident, and average input costs declined for the sixth successive month in April. The sharpest reductions in costs were signalled for Ireland and the US. Input prices in the Eurozone fell at the fastest pace in the series history, but slower than the global average. The UK and Russia reported higher costs in April.

The JPMorgan data is also backed by the results of the twice-yearly survey of service sector sentiment published by Markit Economics this week. The survey is carried out in the same companies as are sampled for the monthly purchasingmanagers' indices, and showed thatcompanies in European and emerging markets services sector havenow recovered much of the confidence lost at the start of the global recession.

The majority of companies report that they expect the volume of business to improve over the coming year, with revenues growing and new orders rising. There are however important differences, since while greater optimism is evident in the Bric countries of Brazil, Russia, India and China, some European economies have notably failed to rebound, with Germany standing out as a centre of gloom at the moment, with many German companies continuing to suffer major doubts that their business outlook will improve.

Across Europe in general, 39.5 percent of service providers stated they expect their volume of business to improve over the year ahead with 21.5 percent forecasting a decline. Thus there is a positive balance of +18. This balance is far higher than the -2.9 figure recorded last October, though it is not yet at the +30 level of a year ago when few companies saw a deep recession ahead.

In the Bric countries, on the other hand, the mood is even better. The balance of Brazilian companies expecting higher volumes of business was +60.4, higher than a year ago, and the steep declines in confidence earlier witnessed in Russia and India have now been reversed. The outlier here is the Chinese service sector, which is a little less optimistic than sixmonths ago, even if the outlook is still broadly optimistic. This may well suggest that earlier Chinese reactions where rather over optimistic, since the country’s export sector is still facing veryserious problems.

Eurozone

The Eurozone services PMI staged its biggest one-month rise since December 2001 as Markit unexpectedly revised up its services business activity index to 43.8 following the earlier flash reading of 43.1. Activity thus registered its slowest pace of contraction in six months in a sector which covers everything from financial services to airlines. The figure was well above the 40.9 registered in March, but still heavily in contraction territory. The rate of contraction did, however, slow in all four of the biggest euro zone countries even reaching the slowest rate of contraction in nearly a year in Spain.

The eurozone composite PMI, which includes both manufacturing and services, was also up strongly - to 41.1 from 38.3 in March. This was again the highest level since October, and suggested the rate of economic contraction in the second quarter of the year may be rather better than the 1.9 percent contraction rate expected by consensus estimates for the first three months of the year. The eurozone economy contracted at a 1.6 percent in the final months of 2008 and we may well be in for something similar in Q2.

The movement in the reading for services business expectations to 54.4 from 48.6 in March was the biggest one-month rise in this index since January 2002, and this is likely to further encourage optimists who expect the eurozone economy to start to grow again before the year is out, but really it would be very premature to draw any longer term forward looking projections at this point, especially given sensitivity in the index to seasonal factors like Easter and the weather.

Business expectations were generally up, and were the best in 15 months for Spain, and in 10 months in both Germany and France, while in Italy they hit an eight-month high. The report, however, did suggest that unemployment, which is already at 8.9 percent for the euro area as a whole (and 17.4 percent in Spain), is set to rise even further, with record rates of job cutting being reported across the entire euro area service sector.

All eurozone countries reported significant downward price pressures, and these are reflected in producer prices (which fell over 5% year on year in March, lead mainly by energy and commodities) and consumer price disinflation, where year on year price increases were only 0.6% in April, for the second month running.

Spain

Spanish service sector activity continued to decline in April although as elsewhere the rate was much slower than in previous months. The headline activity index stood at 42.5, still well below the critical 50 level indicating growth, but way above 34.1 in March and November’s record low of 28.2. April’s figure was in fact the highest recorded since May 2008 but nevertheless marked the 16th consecutive month of contraction as the deep recession weighed on new orders and jobs. According to Andrew Harker ,economist at Markit Economics, “Jobs continued to be lost at a fast pace, indicating that the labour market remains a key source of weakness.”

The survey showed staffing levels declined in April for the 14th month running as service providers cut jobs due to lower activity and to keep costs down. Hotel and restaurant firms were the hardest hit. However despite Spain’s deep and ongoing economic crisis, April’s survey was marked by confidence levels not seen in 15 months. Many of those surveyed by Markit said they believed the crisis would end within a year, with two-fifths of panellists expecting activity to be higher in 12 months and just 22 percent forecasting lower activity. However, companies remained relatively cautious about short term economic prospects.

The service sector thus is showing a significantly sharper rebound from the record declines of the last few months than is to be seen in the manufacturing sector, which continued to contract at a rapid pace in April.

Prices continue to fall, and services output prices registered the third-fastest decline in the survey’s history, second only to February and March this year, with those surveyed citing increased competition for new business and pressure from clients. Service providers also reported falls in input costs due to reduced labour costs and lower prices from suppliers, but, according to Markit, the decrease here was less marked than that for output prices.

Italy

Italian service sector activity contracted for the 17th consecutive month in April although at the slowest rate for six months. The Markit/ADACI Purchasing Managers’ Index rose to 42.0 from 39.1 in March, but still is not that far above the record low of 37.9 recorded in February. Activity has now been stick below the 50 mark that separates growth from contraction since November 2007.

The survey showed new business shrinking for the eighteenth straight month in April, though the rate of decline eased for the second month running, while expectations of business in a year’s time rose to an eight-month high. As elsewhere, while optimism is rising Markit did point to record job losses as a likely on consumer spending looking ahead, making hopes of a swift recovery extremely premature. The employment sub-index fell to 44.0 from 44.6, as firms cut jobs at a survey record rate in response to the ongoing loss of business. The survey is thus consistent with other recent indicators that have pointed to an economy still mired in the deep recession that began in spring of last year, but with some grounds for thinking that the lowest point may now have been passed. Consumer and business sentiment as measured by the ISAE institute both rose in April, and the manufacturing PMI showed activity shrinking at its slowest rate for six months after the index hit a record low in March.

Deflationary pressure remained evident with service firms cutting their prices for the seventh month running and at the fastest rate in the survey’s history in response to weak demand, while input prices showed no monthly increase for the first time since the survey began. The Italian government slashed its economic forecasts last week, and now project gross domestic product to fall by 4.2 percent this year following last year’s 1.0 percent decline. The International Monetary Fund is more pessimistic, forecasting a 4.4 percent fall this year and a further drop of 0.4 percent in 2010. Italy thus now possibly faces three years of economic contraction one after the other although previously the country had not posted two consecutive years of falling GDP in its entire post-war history.

Germany

Activity in Germany’s private sector shrank for the eighth month running in April, though as elsewhere the pace of the contraction eased, in the German case to the slowest rate since last October. The services sector PMI edged up to 43.8 from 42.3 in March, while the business expectations sub index jumped to 44.4 from 39.0, and the headline composite PMI reading rose to 40.1 from 38.3 in March.

Markit reported that “Pessimism about the year ahead outlook for activity was the least marked since June 2008. This partly reflected the support given to business sentiment from the government’s economic stimulus plans, as well as hopes that overall market conditions will begin to stabilise”. These firmer expectations are consistent with the rise in the April Ifo reading for German corporate sentiment, which hit its strongest level in five months.

However, despite the more positive business expectations, the German government has slashed its forecast for the economy, projecting a record 6-percent contraction this year. Previously it had not shrunk by more than 1 percent in any year since the second world war.

In harmony with this more sober assessment, the sub-index on employment fell to 40.6 from 42.3 in March. “We are now seeing the labour market feel the full force of the economic downturn, with the latest wave of private sector job losses the steepest for at least 11 years,” according to Tim Moore, economist at Markit Economics. “This provides advance warning that April’s spike in official unemployment numbers will be repeated during the months ahead … firms are likely to make further substantial job cuts even after the worst of the recession has passed,” he added. German unemployment rose for the sixth month running in April to hit its highest level since late 2007 despite government subsidies designed to prevent mass layoffs.

France

The contraction also eased in the French services sector in April, this time for a second successive month in April, and the Markit/CDAF final services PMI reached its highest level in six months at 46.5, up from 43.6 in March. The composite PMI also rose to 43.8 for the month, from a revised figure of 40.2 in March.

According to Markit panellists continued to report that overall operating conditions remained unfavourable and that falling new business had again negatively impacted on activity. New orders to service providers fell for the seventh consecutive month, with hotels and restaurants bearing the brunt of the downturn as customers cut back on discretionary spending. The business expectations index on the other hand climbed to 58.3 in April from 51.9 in March, and responses were more optimistic, with Markit reporting that 37 percent of respondents expected output to be higher in twelve months’ time.

In the short term, however, the picture was pretty similar to that seen elsewhere , with firms continuing to make painful adjustments to cope with a harsh economic environment, slashing prices to boost sales, and making further sweeping cuts to staffing levels. April’s output prices index showed prices falling for the eighth straight month, hitting a record low of 38.1, compared with the March reading of 38.4. The services employment index rose slightly to 41.0 from 40.8 in March, but still remained close to February’s survey record low of 40.6, indicating a further steep contraction in the service sector workforce, according to the Markit report.

Russia

Russia’s service industries contracted at the slowest pace in six months in April as business confidence improved, according to the monthly report from VTB Capital, with the PMI coming in at 44.4, compared with 43.9 in March.

While Russian services activity fell for the seventh consecutive month, it continued to rebound from December's record fall of 36.4. The rate of decline in new orders also eased for the third month in succession after registering a record contraction in January. Prices charged by companies declined for the first time since VTB started compiling the survey as providers competed by offering lower prices and discounts, according to the report. Input prices advanced at the slowest pace on record.

Russia's inflation rate fell slightly in April, dropping to 13.2 percent after rising to 14 percent in March, with consumer-price growth slowing to 0.7 percent month on month, according to the Federal Statistics Service. Retail sales were down an annual 4 percent in March, the biggest decrease since September 1999, as frozen credit markets and falling incomes forced Russians to curb spending, while GDP is now thought to have fallen 9.5% year on year in the first quarter of 2009.

United States

U.S. service-producing industries contracted again in April for the seventh straight month, but again the pace was slower than in March, according to the US Institute for Supply Management.

The ISM non-manufacturing index improved to 43.7% from 40.8% in March. This was the first increase since January. The index has now been below 50% since October, and touched its lowest level of 37.4% in November. Seven of 18 industries surveyed actually showed frowth in April, including real estate, entertainment, retail, and finance. The new orders index improved to 47.0% from 38.8%.

The employment index improved to 37% from 32.3%, indicating a slackening in the pace of job destruction.

By Claus Vistesen: Copenhagen

One cannot fault the good journalists for trying, one really can’t. Yet, as hard as they tried they could not get President Trichet to concede that the ECB has now entered some form or state of quantitative easing as well as they could not wring an answer as to whether the 1% interest stance would constitute an intermediate floor for the ECB policy rate. Before, however, we get ahead of ourselves let us begin with the beginning.

The almost trivial outcome of today’s council meeting in Frankfurt was actually the decision to push the main nominal interest rates down 25 basis points to 1%. If anything, risks to this decision seemed to come from the upside in the sense that all the talk of impending green shoots and second derivatives would make the ECB pause. What was always going to be much more interesting at this meeting would be whether the ECB would announce a series of those famous unconventional monetary measures, and if so; what they would be. In their comment leading up to today’s decision, Danske Bank economist Frank Øland pointed out that he expected some form or measure of buying paper or assets. For my own part, I mused a bit on what the heck the ECB was saying in the first place conceding that talks about unconventional measures were indeed popping up in the statements of council members.

Consequently, the ECB brought three things to the table today in the form of longer term refinancing operations, the decision to let the European Investment Bank become eligible counterparty to the Eurosystem’s monetary policy operations and most importantly a decision to, in principle, start buying covered bonds of which 60 billion euros was mentioned as the headline figure.

Now, all this about principles of course is open to a wide range of interpretations and Trichet certainly had to dodge a lot bullets at the press conference regarding whether this constituted quantitative easing or not. In the dying minutes of the conference Trichet himself used the words credit easing, and I will let be up to my readers to decide what this means. The president also snubbed FT reporter Ralph Atkins in his question of whether he was allowed to write that the ECB is printing money or, as it were, sterilizing the purchases. The more interesting bit here of course is why exactly the ECB would be buying covered bonds, of all assets. In order to understand this, you basically need to go to Spain and recount the story about cedulas hipotecarias, what they mean for the Spanish financial system and the stress her banks are currently suffering. Start with this one by Edward and then this, this, and this. And if that is not enough, you can go chew on the role of the German Phandbrief. Basically, I think there is a sound economic rational behind the ECB’s decision to begins its asset purchase program on this front and whether we call it quantitative easing or not is of little matter I think. It will be most interesting next meeting to see what exactly the ECB is planning in the detail.

With respect to the economic outlook and the level of interest rates and its future change, we were served the regular bout of newspeak from the council which essentially is a reflection of the fact that the journalists were trying to get Trichet to pre-commit to an interest rate floor. Their endeavors were unsuccessful and in stead we got a rather conflicting message in the sense that while Trichet pointed out how 1% constituted no such thing as a floor, he also highlighted the idea that the current stance was appropriate and had also taken into account future weaker signals on the economy. In this light, we can only guess as to how forward looking the council believes the 1% nominal interest rate really is. Personally, I think that the extent to which the green shoots/second derivative punt continues the ECB will stand pat at its next meeting.

Economic Outlook

(click on graphs for better viewing)

Turning to the specifics of the economic situation the ECB rightfully recognised the severity of the situation in the introductory statement and pointed out that risks are still skewed to the downside even amidst green shoots. It is rather obvious that the downturn is in full force and the recession is now also biting, as it were, on the real economy. This is most obvious from the quick deterioration on the labour market as well as the general slowdown in the real sector.

In terms of inflation, the message was a bit unclear in so far as I think the fundamental discourse is counter intuitive. There is a natural reason as to why this is though in the sense that the ECB would like to be worried about deflation at the same time as it wants to be adamant about anchoring inflation expectations and ever so pointing out that whatever unconventional measures taking are temporary.

There can be no doubt that the Eurozone is teetering on the brink of deflation but since this is also primarily a base effect from a very sharp reduction in commodity prices, the ECB is happy to stick with the standard argument that although inflation should turn negative in mid year it will rebound in subsequent quarters. The fact that headline inflation is adding negatively to the overall HICP can be seen from the negative sign of the graph plotting the spread between core and the main HICP index. it is interesting to observe how the ECB is now confident that energy prices won’t lead to an entrenchment towards deflation when we all remember how the bank was terrified of second round effects from higher energy prices a year ago. Perhaps this asymmetry in the famed argument of nominal rigidities and how this may prevent the Eurozone from deflation is what disturbs me the most. Add to this of course that Trichet still maintains that the council is represent 329 million European citizens which apparently means that he does not see, or wants to mention, the fact that places such as Ireland and Spain are already well and truly bogged down in deflation. On the other hand of course, and given recent signs that commodity prices are beginning to sneak back up, we should expect the ghost of second round effects to emerge once more.

Finally, it is interesting to look briefly at financing and credit conditions where it was noted by Trichet how lending to households and non-financial corporations are still falling. Also, if we look at the annual rate of growth in the much allured M3 measure it has also fallen back steadily. Now, just as I don’t care much about the M3 when it running at 10+% I am not sure I care much now since the creation of money/deleveraging may have a life of its own beyond the M3. Of course, as Danske Bank points out basing their analysis on the lending survey there may also be a second derivative here too, but this would only echo the general sentiment expressed by Trichet in the sense that whatever stabilization we are observing it is situated at very low if not negative levels.

Turning to the evolution of credit the picture is similar. The figure which is actually underestimating the trend because of the one year moving average clearly shows though how the flow as derived by the total stock is on a clear downtrend. In both Q4-08 and Q1-09, the evolution of the stock of household loans was negative. Moreover, Danske Bank’s fine analysis of the lending survey suggests that a lot credit tightening is still clogged up in the pipeline even if the trough may have been reached. The interesing thing here will the extent to which the second quarter will see some improvement over a Q4-08 and Q1-09 which were clearly utterly abysmal. Note also that the chart to the right is an average which is of course ripe with generalizations. Basically, some economies such as Spain and Ireland are experiencing a much faster rate of contraction in credit than can be derived from this chart. Also and given the fact that this is after all a unique crisis, we really don’t know much the overall stock needs to be capped before we are “done”.

In summary, today was a quite significant meeting if there ever was one and the thing to watch is how the ECB will conduct itself in the covered bond market. As noted above, I am thinking cedulas and Spanish cajas as the main key words.

by Edward Hugh: Barcelona

Japan’s contraction showed signs of easing in March, even though the recession has now set in for the duration, the deepest point may well have been passed. The ship may be stable, but it is still far from being right side up.

Industrial Output Up On The Month

Japan’s industrial output rose in March (more than anticipated), and showed the first gain in six months, suggesting that the steepness in the plunge in production and exports may be softening. The rise followed a record 10.1 percent fall in industrial production in January and a 9.4 percent drop in February. Manufacturers also forecast further gains in production in the coming months, suggesting output may be bottoming out after the sharpest decline on record in the first quarter of the year.

Industrial production rose 1.6 percent in March, more than the 0.8 percent rise forecast by the economic consensus. In the monthly ministry survey manufacturers stated they expect output to rise 4.3 percent in April and 6.1 percent in May.

This impression is also confirmed by the latest Nomura/JMMA Japan Manufacturing Purchasing Managers Index reading, which rose to a seasonally adjusted 41.4 in April from 33.8 in March, the steepest gain since data were first compiled in October 2001. However the index remained below the 50 threshold that separates contraction from expansion for the 14th straight month.

Japan is currently passing through its worst recession since World War Two. Following a 3.2 percent slump in the fourth quarter the economy is expected to contract even more in the first quarter, despite some tentative signs of a softening in the contraction. Exports, for example, rose in March over February, the first month on month expansion since September last year.

Retail Sales Fall Again In March

Japan's retail sales fell for the seventh consecutive month in March, and were down by 3.9 percent from a year earlier in non price adjusted terms. This follows a 5.7 percent drop in February - the steepest pace of decline since February 2002. From a month earlier, seasonally adjusted retail sales dropped 1.1 percent in March, to record their sixth straight monthly decline.

With the economy in such a sharp contraction, and unemployment rising, families are obviously apprehensive about the future, and have been spending less. Average monthly household spending declined 0.4 percent from the previous year in March, according the Ministry of Internal Affairs and Communications. The average household spent 310,680 yen ($3,186). This follows much steeper annual declines of 3.5% and 5.9% in February and January respectively. So, in line with other indicators, the household spending picture did improve slightly in March, and retail sales were not falling as fast as they had been.

Confidence among Japanese small traders rose to an eight-month high in March, adding to signs that the economic situation improved somewhat. The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, climbed to 28.4from 19.4 in February, the second-biggest jump on record, according to the Japanese Cabinet Office.

Japan's consumer sentiment alos rose - to a five-month high - in March, and the confidence index climbed to 28.9 from 26.7 in February. The index has now advanced for three consecutive months since after plunging to 26.2 in December, its lowest level since the government began compiling the figures in 1982.

However, Japanese wage earners’ total cash earnings fell at the fastest rate in nearly seven years in March from a year earlier, as companies worked desperately to cut costs. Overtime pay fell a record 20.8 percent from a year earlier as many Japanese manufacturers stopped factory lines following the plunge in global demand. Total cash earnings fell 3.7 percent to 273,561 yen ($2,805) in March, the largest fall since July 2002, when wages fell 5.7 percent. It followed a revised 2.4 percent drop in February. Both disposable income and real wages have been falling sharply since the start of 2009.

Deflation Setting In Again

Japan's consumer prices - as measured by the general index - fell for the first time in more than a year in March, a sure sign that deflation is resolutely raising its ugly head again. The general index fell by 0.3%, while consumer prices excluding fresh food declined 0.1 percent from a year earlier. The core core index - excluding both food and energy - also fell 0.3%. Bank of Japan Governor Masaaki Shirakawa argued last week that he sees little risk of a deflationary spiral, even though the BoJ policy board forecast that consumer prices will drop 1.5 percent this fiscal year and 1 percent in the year starting April 2010.

Unemployment On The Rise

Japan’s unemployment rate jumped to 4.8 percent in March, the highest level in more than four years. The total number of unemployed people rose by around 670,000, or 25 percent, from a year earlier to 3.35 million in March. The unemployment rate, which was 4.4 percent in February, is now the highest since August 2004, although it is still below the post-World War II high of 5.5 percent last seen in April 2003.

But behind the headline unemployment numbers, a very significant restructuring would seem to be taking place in the labour force. If we look at the charts below (which shows the size of the “regular” - permanent contract - labour force, as well as movements in the employment of full time and part time workers), it is evident that there was a sharp drop in the regular workforce (around a million) between December and January. Since total employment did not reflect this change, it would seem that there was a significant change in the form of contract (structural reform) and this increase in temporary and part-time employment would seem to be reflected in both earning figures and spending patterns.

The Japanese economy is set to shrink by 3.3 percent this fiscal year according to the latest government forecast, and by 6.1 percent in 2009 according to the IMF spring forecast. Finance Minister Kaoru Yosano said last week that the economy remains in "crisis" as the slump in exports and factory output evidently will continue to take a toll on employment. Prime Minister Taro Aso’s Cabinet recently submitted a massive supplementary budget to finance a new stimulus package. Aso has called for a record additional 15 trillion yen ($155 billion) in government spending, equivalent to about 3 percent of Japan’s gross domestic product. The government argue the newest stimulus package will help protect the economy from slipping further while laying the foundation for future growth, including incentives for buying “eco-friendly” cars and home appliances. It also provides support for the unemployed and small businesses. However, despite such bold claims the Japanese governments hands are most firmly tied by the very large levels of existing debt (see chart below), with the IMF forecasting that Net debt will rise to 103.6% of GDP in 2009, and gross debt to a staggering 217% of GDP. So basically, however much the current stimulus package may serve to soften the blow of the downturn in global trade on Japanese households any real recovery will have to await a recovery in global trade, and despite all the current talk of “green shoots” everywhere, we are still some way from being able to perceive this at this point.