European stocks advanced last week, fuelled by satisfactory growth figures for the German and French economy. Italy's economy, meanwhile, grew marginally at the end of last year, for the first time since the middle of 2011. The market also reacted positively to Rome’s likely new prime minister, after Prime Minister Enrico Letta said he would tender his resignation on Friday. Letta's decision to quit came after the PD supported a call by its 39-year-old leader Matteo Renzi for a more ambitious government to pull Italy out of its economic slump. Italy's stock exchange led European shares higher on Friday.
The rebound in European markets has been even stronger with Thursday’s 0.2% decline breaking a 6 session days, uninterrupted advance, for the Stoxx Europe 600 index. As far as the earnings season is concerned, out of a total of 152 companies that have reported earnings so far, 76 have reported positive surprises with an average surprise of a +39%. So after (surprisingly) good earnings figures for the last quartile the trend seems to continue.
Meanwhile the economic sentiment seems to gain momentum. A gradual upturn in investments of the German economy seems to be leading the European economy into a more stable climate. The confidence levels of the core European countries are improving in favorable directions.
Eurozone Retail PMI data are based on national data for the three largest Eurozone economies. Germany recorded a solid and accelerated increase in sales at the start of the year: the fastest since August. In the meantime France posted a fifth straight monthly decrease in retail trade, though the rate of decline eased sharply since December to only a marginal pace, and one that was the slowest in this sequence. Italy remained the main area of weakness, with retail revenues falling at a solid rate that was barely different from the preceding survey period. However, from a political perspective Italy seems to have made the first step, as markets reacted positively to the political developments within Italy last week.
Overall Eurozone confidence is still not overwhelming in absolute terms, but signals are pointing us towards a continuation of the aforementioned upward trend. In other words, the momentum is there: if inflation will be taken care off and if earnings are deploying theircurrent trend, the Eurozone will movetowards a stable state.
Especially the European retail sector shows strong recovery. The industrial sector is still the only sector on the European continent which is in a contractionary mode. From an analytical perspective the European Union is heading in the right direction, but ongoing deflation as well as unbalanced employment might become severe problems obstructing further economic growth.
The unemployment figures seem to be rather positive, as employment is growing gradually since mid-2013. When taking a more in depth look at how the employment is calculated, we still see major problems as the youth unemployment, especially for peripheral countries, is still increasing significantly. We can lay-off these problems quite easily by looking at the real unemployment, although we can no longer ignore that these structural misfits within the way we look at employment figures will become a future problem for our society.
To sum up, the deterioration in labor market outcomes for young workers in the euro area since the onset of the crisis has been stronger in countries under market stress, which have experienced dramatic rises in youth unemployment and non-participation. High, persistent youth unemployment is one of the main challenges faced by European policy-makers today in view of the associated high social and economic costs.
Another problem which might come into play is the inflation.
Gradually we are shifting towards a deflationary territory. Led by the peripheral countries, this trend seems to be hard to break. Mario Draghi has emphatically denied that the Eurozone could fall into a deflationary trap, and does not seem inclined to do anything about it now.
Central bank intervention
In order to not fall into the same trap as Japan did we do believe it is time for measures from the ECB. We therefore consider it quite likely that the ECB will cut its refinance rate by around 15 basis points before this quarter ends.
Easing of the ECB would be an appropriate response to recent volatility within the money market rates, and would also be the right action to shift the current deflationary trend. We do see that loans within the Euro area are contracting. It is clear that the ECB has taken a less accommodative policy than most other Central Banks.
The resources therefore seem to be at hand. When issues such as inflation and youth unemployment will become of greater importance, we do expect the ECB to loosen up its policy and we also expect quantitative measures. With relatively good fundamentals and resources at hand to intervene, we are really positive about the European Union in general. For the time being, investments within the Euro Stoxx do have our preference.
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Main interests of Furda are macroeconomic developments and trends.