With the Greek debt swap in place, focus could return to the remainder of the eurozone. The Eurogroup and ECOFIN meeting at the beginning of the week did not attract market attention. The discussion on whether and how a transaction tax should be introduced was pushed to the end of this month. The impact of the LTROs has been massive and even the euro area leaders such as Merkel have stated that the sharp increase in liquidity has bought the euro area leaders up to two years to fix the euro area’s fundamental problems.
The data released this week confirmed the continued recovery in the core while the peripherals are still suffering. German ZEW expectations improved from 5.4 to 22.3. The percentage of participants in the German ZEW survey saying they expect the economic situation to worsen has fallen from 61.1% to 13.5% in just three months. The indicator continues to signal that PMI manufacturing should go higher. Euro area January industrial production increased 0.2% m/m. The increase was driven by a decent increase in Germany (1.5% m/m) while Spain (-0.2%) and Italy (-2.5%) are weighing down. The reading is in line with our expectation of a small decline in GDP in Q1 of 0.1% q/q. The second reading on the euro area inflation confirmed an increase to 2.7% in February from 2.6% in January. The details showed that core inflation remained unchanged at 1.5% in February. Danske see no signs of underlying inflation pressure. With regard to inflation, it is mainly the contribution from increasing oil prices that are in focus, but this time around Danske do not expect any response from the ECB.
Spain attracted attention last week. Housing market data was released and showed a massive decline in Spanish house prices in Q4 of 4.2% q/q. Prices are now 11.2% lower than a year ago. Furthermore, Spain has accepted a new 5.3% of GDP target. The Spanish government unilaterally raised its target from 4.4% of GDP to 5.8% of GDP, but has now accepted the new target put forward by the Eurogroup on Monday. Nevertheless, it is quite likely that Spain will miss the target, in particular if the housing market continues to deteriorate as we expect.
In the euro area watch out for the Flash PMIs for March to be released on Thursday. Danske expect that they will show some improvement as the euro area is heading out of a short recession, driven by a pickup in global growth and helped by ECB’s 3Y LTRO. Nevertheless, euro area PMI for both services and manufacturing will probably stay just below the “50” borderline, which indicates a mild contraction. The flash PMI is projected to signal stronger growth in Germany, while French figures should only improve a little. Another important indicator of growth is the euro area industrial orders to be released the same day, but these are data for January. Following a sharp and somewhat surprising improvement in December Danske expect a -1.5% m/m decline in new orders. Euro area consumer confidence should also improve, although it is still at rather depressed levels.
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