Good news…
Yesterday we wrote that the strong flash PMIs was a good news for the euro zone and the common currency. However, digging deeper into this reasoning, we feel that the impact will be felt mostly long term. The best part about a rebound in activity in Northern Europe is that it will increase the ability of those countries to finance the euro-project – something that has been questioned recently (and resulted in a cut of the French rating). Consequently, with countries like Germany and France recovering (even slowly) rather than stagnating or contracting, the risk of the direst scenarios (like the breakup of the zone) decreases.

…and bad news from Europe
Improved economic conditions in the North are -  ceteris paribus – positive for the South as well. However, that might not be enough to restore a) those economies to the path of growth ) faith in those countries that would reduce costs of their debt service. The latest “hard” economic data from the PIGS are indeed dire: the output is shrinking at the pace from 4% in Italy, through 6% in Spain to 11% in Greece. 
Difficult negotiations on the debt swap in Greece reveal one thing – those countries will need more money and while the North might be capable of offering larger bailouts, it might not be willing to do so.
Furthermore, a return of a Greek issue may pose a risk to more ambitious – but necessary – project of fiscal compact. We wrote in December that while the idea was good we were skeptical about the pace of revealing details, given a level of political difficulty. Now with Greece back in the spotlight and with improved market conditions the risk of a delay increases substantially.
To sum up, a rebound in the PMIs is definitely a welcome news and while it improves the prospects for the whole year, it doesn’t necessarily need to translate into an outburst of optimism right now, especially as we are not quite at the bottom when it comes to the sentiment. 

Fed’s meeting
Investors’ attention is likely to drift to the US today, as they brace for the FOMC decision and conference. According to the latest meeting minutes the Fed will present a forecast of the target rare and it is expected that no hikes will be projected at least until the end of 2013. That sounds like a good news but as we noticed in a snapshot on Monday there is a good deal of risk that it will actually start a profit-taking, just like it did back in 2010.

Przemysław Kwiecień PhD, Chief Economist

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