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Markets Jump on Hopes for European Action Markets Jump on Hopes for European Action
(about 3 hours later)
The beleaguered euro zone remains stuck in recession, according to data published Tuesday, but stock and bond markets rallied because the news raised expectations that the European Central Bank would cut interest rates as early as next week. The beleaguered euro zone remains stuck in recession, according to data published Tuesday, increasing pressure on the European Central Bank to find a way to stimulate growth soon.
A closely watched survey of business managers showed that the euro zone economy was still declining and that the German economy could take longer than expected to emerge from recession. Stock and bond markets rallied on hopes that the E.C.B. would cut the benchmark interest rate for euro countries as early as next week. On Wall Street, the Standard & Poor’s 500-stock index, the Dow Jones industrial average and the Nasdaq composite index all closed with gains of more than 1 percent, while the 10-year Treasury bond yield touched 1.645 percent, the lowest intraday level since Dec. 12.
Germany has served as the main counterweight to economic malaise elsewhere in the euro zone, and a continued slowdown there could delay a recovery on the whole Continent. Separately, the Dow Jones industrial average skidded more than 150 points briefly in mid-afternoon before recovering after the Twitter account of The Associated Press was hacked and a fake tweet about an attack on the White House was posted.
Still, markets cheered the pessimistic outlook because of expectations it will prompt the European Central Bank to cut interest rates or take other action when it meets next week. On Tuesday, the Hungarian Central Bank brought its rates down a notch, to 4.75 percent. But outside of trading rooms, the European data were not likely to inspire any joy.
The French stock market index ended with a gain of 3.6 percent, while the interest rate on its 10-year sovereign bond hit a record low of 1.706 percent. Other major European stock indexes also recorded sharp gains while bond yields fell. Besides pointing to continued decline in the euro zone economy, the survey of purchasing managers by Markit, a research firm, showed that Germany could be slipping into recession.
American stocks were up about 1 percent in afternoon trading, and the 10-year Treasury bond yield touched 1.645 percent, the lowest intraday level since Dec. 12. Separately, the Dow Jones industrial average skidded more than 150 points briefly before recovering after the Twitter account of The Associated Press was hacked and a fake tweet about an attack on the White House was posted. Germany has served as the main counterweight to economic malaise elsewhere in the euro zone, and a prolonged slowdown could delay a recovery on the whole Continent.
Outside trading rooms, though, the data was not likely to inspire joy. In Germany, for example, prolonged recession could present a problem for Chancellor Angela Merkel as her party campaigns to remain in power in elections this autumn. The Flash Germany Composite Output index issued by Markit fell to 48.8 in April from 50.6 in March, a six-month low. A reading below 50 is considered a sign that the economy is likely to contract. For the euro zone as a whole, the corresponding index was unchanged at 46.5, confirming that the region remains in a rut.
The Flash Germany Composite Output index, issued by Markit, a research firm, fell to 48.8 points in April from 50.6 in March, a six-month low. A reading below 50 is considered a sign that the economy is likely to contract. For the euro zone as a whole, the corresponding index was unchanged at 46.5, confirming that the region remained in a rut. The German economy shrank 0.6 percent in the last three months of 2012. Another negative quarter would push the country into recession and present a problem for Chancellor Angela Merkel as her party campaigns to remain in power in elections this autumn. Meanwhile, the stubborn slowdown in the euro zone is likely to further inflame the debate about how much more austerity troubled countries in Europe can take.
In addition, economic activity in Spain declined 0.5 percent in the first three months of 2013, the Bank of Spain said Tuesday, suggesting that one of the euro zone’s most troubled economies was unlikely to start growing again until next year. Many political leaders are arguing for a greater emphasis on growth. José Manuel Barroso, president of the European Commission, said in Brussels on Monday that while countries need to continue cutting government debt and budget deficits, ‘'we need to complement this with proper measures for growth.'’
In France, the Markit output index rose to 44.2 in April from 41.9 in March, indicating that the pace of decline was slowing in the euro zone’s largest economy after Germany’s. But that tidbit of good news was clouded by a drop in the separate INSEE indicator of French business climate. In Europe’s most troubled countries, there was little sign of a turnaround in growth. Economic activity in Spain declined 0.5 percent in the first three months of this year, the Bank of Spain said in a preliminary estimate Tuesday.
Analysts said the decline in optimism among German managers might be the result of a slowdown in the pace of growth in China, which in recent years has become one of the most important markets for German products like automobiles and machinery. Still, markets cheered the pessimistic survey results because of expectations that they would prompt the E.C.B. to cut interest rates or take other action when its policy-making board meets May 2.
In general, German companies may be suffering from uncertainty about which way the major economies in the world are going, said Ralph Wiechers, chief economist of the German Engineering Federation, an industry group in Frankfurt that represents makers of machine tools and high-priced industrial goods. On Tuesday, the central bank of Hungary, which is not a member of the euro zone, cut its main interest rate to 4.75 percent from 5 percent. It was the bank’s ninth rate cut in as many months.
“The mood is cautious, neither euphoric nor skeptical,” Mr. Wiechers said. “People are waiting to see.” The benchmark French stock market index, the CAC 40, finished the day 3.6 percent higher, while the interest rate on France’s 10-year sovereign bond hit a record low of 1.706 percent. Other major European stock indexes posted gains of more than 2 percent while bond yields fell.
Johann Sailer, managing director and owner of Geda Dechentreiter, a German maker of elevators used on construction sites and drilling rigs, said that demand in the construction industry was still good but that the pace of growth might have slowed for some companies. For France, the Markit output index rose to 44.2 in April from 41.9 in March, indicating that the pace of decline was slowing in the euro zone’s largest economy after Germany’s. But that tidbit of good news was clouded by a drop in the separate Insee indicator of the French business climate.
“They have a lot of work,” he said of companies in the building industry. “It’s moving a little bit sideways at the moment, but I don’t see any dramatic slowdown.” The decline in optimism among German purchasing managers might be the result of a deceleration in the pace of growth in China, which in recent years has become one of the most important markets for German products like automobiles and machinery. China has helped to compensate for weak demand in the rest of Europe.
‘'The last nine months have been very slow in our business,'’ said Joachim Schönbeck, a member of the management board of SMS Group, a German company that builds and equips factories to produce steel and other metals.
Mr. Schönbeck said that there were signs that China was picking up again because of new political leadership, while demand was strong from countries like Russia, India and the United States. But he added, ‘'Demand is slowly decreasing in Europe.'’
In general, German companies may be suffering from uncertainty about which way the world’s major economies are going, said Ralph Wiechers, chief economist of the German Engineering Federation, an industry group in Frankfurt that represents makers of machine tools and high-priced industrial goods.
‘'The mood is cautious, neither euphoric nor skeptical,'’ Mr. Wiechers said. ‘'People are waiting to see.'’
Even if Germany is merely treading water, that is still bad news for the rest of the euro zone. The resilient German economy has played a crucial role in compensating for the swath of economic woe that runs from Cyprus to Ireland by way of Greece, Italy, Spain and Portugal.Even if Germany is merely treading water, that is still bad news for the rest of the euro zone. The resilient German economy has played a crucial role in compensating for the swath of economic woe that runs from Cyprus to Ireland by way of Greece, Italy, Spain and Portugal.
“The German economy may not be as strong as we thought,” Marie Diron, a senior economic adviser to the consulting firm Ernst & Young, said by e-mail. ‘'The German economy may not be as strong as we thought,'’ Marie Diron, a senior economic adviser to the consulting firm Ernst & Young, said by e-mail.
Members of the governing council of the European Central Bank have hinted recently that an interest-rate cut could be nigh. Mario Draghi, the president of the E.C.B., said earlier this month that policy makers were “ready to act.” Members of the Governing Council of the E.C.B. had already hinted that an interest rate cut could be imminent. Mario Draghi, the president of the E.C.B., said earlier this month that policy makers were ‘'ready to act.'’
The new data raised expectations that a cut in the benchmark interest rate, already at a record low of 0.75 percent, could come when the E.C.B. meets on May 2. The new data Tuesday further raised expectations that a cut in the benchmark interest rate, already at a record low of 0.75 percent, could come when the Governing Council meets next month.
It is also possible that the E.C.B. could look for other ways to ease a credit crunch in countries like Italy and Spain. Mr. Draghi has often complained that low official interest rates have not benefited companies in the troubled countries because banks remain too reluctant to lend. ‘'It is no longer a matter of if but when the E.C.B. will be cutting rates,'’ analysts at Nomura said in a note to clients Tuesday.
“It is no longer a matter of if but when the E.C.B. will be cutting rates,” analysts at Nomura said in a note to clients Tuesday. It is also possible that the E.C.B. could look for other ways to ease a credit crunch in countries like Italy and Spain, though it is not clear what other options are available. Mr. Draghi has often said that low official interest rates have not benefited companies in the troubled countries because banks remain too reluctant to lend.
Mr. Draghi has predicted that the euro zone would begin recovering gradually later this year. But if the rebound takes longer than that, it could have political as well as economic effects.
Prolonged economic pain would make it that much more difficult for Italy to form a stable government, and could weaken Ms. Merkel, the German chancellor, in national elections this autumn.
While Ms. Merkel has a solid lead in polls, she does not have enough support to win an absolute majority in the Parliament. A weaker showing would force her to share more power with her coalition partners.
At the same time, German unemployment remains low at 5.4 percent, compared with a record high of 12 percent for the euro zone as a whole. Many German managers remain relatively optimistic.
Johann Sailer, managing director and owner of Geda Dechentreiter, a German maker of elevators used on construction sites and drilling rigs, said that demand in the construction industry was still good but that the pace of growth might have slowed for some companies.
‘'They have a lot of work,'’ he said of companies in the building industry. ‘'It’s moving a little bit sideways at the moment, but I don’t see any dramatic slowdown.'’