We see China’s economy as on stronger footing than typically depicted, in both absolute and re...
A European Rate Hike Is Coming
06/06/2011 3:31 pm EST
The European Union and the International Monetary Fund approved the fifth installment of the $161 billion bailout for Greece on June 3. That clears the way for a new, more comprehensive bailout program—which is still under negotiation.
More importantly for the near term, I think, the IMF and European Central Bank approval clears the way for the ECB to clearly signal its intention to raise interest rates in July.
The bank raised its benchmark interest rate to 1.25% in April, creating speculation that the bank was about to start a series of rate increases to fight inflation. That speculation drove the euro higher against the dollar, since the US Federal Reserve had all but announced that US interest rates weren’t headed higher until the end of 2011 at the earliest.
In May, the bank disappointed traders by signaling that it wouldn’t raise interest rates in June, as some had hoped. That fed into a decline in the euro against the dollar that was also getting plenty of fuel from renewed worries about a Greek debt default.
Expectations for the June 9 report on the Eurozone are that the bank will raise projections for economic growth from the current 1.8%, and for inflation from the current 2.3%. The European Central Bank aims to keep inflation close to, but below 2%.
That should be enough for the bank to use the code word “vigilant” in its statement about inflation. That word has become the bank’s signal that it intends to raise rates at its next meeting. Economists surveyed by Bloomberg are now projecting a 0.25-percentage-point increase in the benchmark rate in July.
That signal would probably be enough to move the euro higher and the dollar lower. That, in turn, would give a boost to the prices of commodities and commodity stocks—and to stocks in emerging markets. That would balance the weakness in stocks that has resulted from last week’s dismal US job numbers and fears that the US economy is slowing.
As to whether any statement from the European Central Bank would be enough to actually push non-US equities higher, we’ll have to wait for the bank’s announcement. But at the moment, a signal from the ECB that euro rates are headed higher is the only near-term positive force for equities that I can see.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
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