Tuesday, March 4, 2014

No Financial Meltdown in Eurozone (excerpt)

It wasn’t too long ago that the bears were predicting a financial meltdown in the Eurozone and the disintegration of this monetary union. The only meltdown currently underway in the Eurozone is occurring in bond yields. Spanish bond yields reached new historic lows last Friday as persistent expectations that the ECB will loosen monetary policy further supported lower-rated debt, even though inflation ticked up. Italian 10-year yields are at eight-year lows around 3.48%. Greek 10-year yields fell below 7% for the first time since April 2010, hitting levels seen just before Greece's EU/IMF bailout.

The meltdown in yields is attributable to the meltdown in the Eurozone’s inflation rate, which is somewhat worrisome if it turns into deflation. On Friday, February's flash CPI for the region was up 0.8% y/y, unchanged from the month before. That’s well below the ECB's target of 2% and within the “danger zone” of below 1% as defined by the bank's president, Mario Draghi. This inflation rate was 2.7% two years ago and 1.8% a year ago.

Yesterday, we learned that the Eurozone's M-PMI dipped from 54.0 during January to 53.2 last month. That’s still a solid reading. Germany's dipped but was at 54.8, and even Italy's (52.3) and Spain's (52.5) remained above 50.

Today's Morning Briefing: Cold War II. (1) The Dirty Half-Dozen: Six worries for the bulls according to the bears. (2) Hot and cold world wars. (3) Upbeat employment stats in US regional surveys. (4) Yields melting down in Eurozone. (5) Draghi’s “danger zone.” (6) Chinese set to announce latest GDP growth target. (7) Will it matter if Abenomics fails? (8) Yellen vs. Plosser: Debating forward guidance. (9) Merkel vs. Putin: Who is in touch with reality? (10) Crimea and lots of other crimes. (11) Summering in Sevastopol. (12) Heating up Cold War II? Not likely. (More for subscribers.)

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