Europe: Buy - SAMPLE REPORT

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Monday, 22 May 2006

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Summary

Expect the ECB to be increasingly aggressive in its rate hikes, what with private consumption gathering steam. Nevertheless, Europe’s profits outlook is healthy very much because of strong productivity gains. All of which makes for an attractive market.

The Economic Time™

Monetary Economy:

Eurozone inflation has been accelerating since February 2004. Core inflation lags overall inflation: since it bottomed in July 2005, core inflation has accelerated by 25%. Because of rising core inflation, the European Central Bank (ECB) wants the monetary aggregates to contract. Reserve money contracted the most in March 2003 and began registering positive annual growth rates only last September. Now it is growing 3.4x faster than last September! Growth in M1 is the strongest of all the aggregates, what with overnight deposits rising by 16%. M2 growth is accelerating gently, what with deposits up to two years rising strongly. Growth in M3 is accelerating in line with M2 and with more deposits over 2 years. Lending is growing about 3x faster than when it bottomed in February 2003, driven by loans to other Euro area residents. Monetary Financial Institutions’ holdings of external assets are racing along at 20% growth rates, while their holdings of shares and securities keep accelerating mildly. The ECB started its tightening interest rates in from 2% in December 2005; currently they stand at 2.5%. The yield curve has flattened considerably since then: short rates have budged little while long rates have converged. Inflation is rising, inter alia because the lagged effects of the falling Euro’s exchange rate from May 2003 – December 2005: this was driving up import costs, especially if US dollar-denominated. The market wants to believe that with Euro rates rising, the Euro has to keep rising especially against the yen, but also against the dollar. On a three month monetary policy view, expect the ECB to raise rates, i.e. nurture an excess demand for money: Mr. Trichet keeps saying this; futures trading suggest rates of 3.25% by this December, but we think that 5% is more realistic by mid 2007.

Enzio's Clock - Europe: Buy - SAMPLE REPORT - Comments

Europe: Buy - SAMPLE REPORT

Summary

The Economic Time™

Monetary Economy: