Draghi Headache: Inflation Heating Up in Europe

Mario Draghi
Bloomberg | Getty Images
Mario Draghi

The European Central Bank, as expected, left rates unchanged at 1 percent...and ECB President Mario Draghi refused to comment on Greece. Draghi did say there was a modest pickup in bank lending since the first three-year debt facility at the end of December.

On Greece, the deadline to tender is 3 p.m. ET today; the Greeks will announce the results at 1 a.m. ET Friday. Italy's Prime Minister, Mario Monti, said over 60 percent of Greece's private debt holders have expressed interest in tendering their bonds.

Greek unemployment in December rose to 21 percent from 20.9 percent a month earlier, a new high.

Importantly, Draghi raised the 2012 forecasts for inflation to between 2.1 percent and 2.7 percent. That matters: It means inflation will be above 2 percent in 2012 (with upside risks prevailing). This will make it more difficult for them to lower interest rates further.


1) The beginning of the end for the dollar? Here's an item getting some chatter: China is about to sign an agreement with all the major developing countries to offer loans to them...in renimbi. Not dollars.

The agreement is to be signed on March 29, according to the Financial Times, between China and India, Brazil, Russia, and South Africa.

China said last year it wanted to diversify away from the dollar. Now they are doing it.

Why do all these countries want to get away from the dollar? To some extent, all of them have a reason to be less dollar-centric. For China, there is global power politics: they want the renimbi to be a global currency to project economic and political power.

But there's more to it than that: Explain why China and Brazil trade in dollars exclusively? China has about one-third of its $3.2 trillion in foreign currency reserves in dollars. It has a relatively strong currency — it certainly could not be considered undervalued — and it lessens the need for them to have dollars. If Brazil trades with China in dollars, it is going to be accumulating more dollars. It doesn't need them.

And what about Brazil? The currency there is way too strong, and many there blame the U.S. for a large part of their export problems. Bluntly put: Brazil thinks we're in a currency war, that U.S. Federal Reserve Chairman Ben Bernanke is trying to cheapen the U.S. dollar deliberately. In Brazil's eyes, this is a currency war, because it creates excess liquidity in dollars.

I'm not sure this is a definitive change, but it is part of an ongoing process. This is evolutionary, rather than revolutionary, but the evolution is speeding up.

The species (China's renimbi) is evolving faster than many people thought.

2) Are bank earnings improving? Morgan Stanley raised its earnings estimate for JPMorgan Chase based on improved loan growth among other factors. There is a lot riding on these forecasts: Total earnings on the S&P 500 index are expected to rise roughly 6 percent in 2012, and much of that is coming from bank earnings.

3) It's tough in Europe: Carrefour shares drop 1 percent after Europe’s largest retailer saw profits sink just under 20 percent last year on the back of the region’s debt crisis, slow growth, and the company’s lackluster turnaround plan. Anticipating another tough year ahead, the world’s second-biggest retailer behind Wal-Mart Stores, cut its dividend in half and investment plans. Carrefour halved its dividend to 0.52 euros ($0.69), below the 0.72 euros ($0.95) analysts had expected.

4) Sign of the times? Exchange-traded fund sponsor WisdomTree Investments announced the WisdomTree Emerging Markets Corporate Bond Fund, the first broad-based, emerging market corporate bond ETF.

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