Thursday, November 6, 2008

Strong monetary response in Europe - even good news is perceived as bad

Europeans have been playing catch-up to the US with monetary policy. The Fed has been aggressive at lowering rates for over a year, but the ECB and the BOE have tried to take a more gradual approach. Their belief was that monetizing the commodity shock would not be good for their economies and was at odds with their stated objectives.

The economic data rolled in during the second and third quarter and showed economies that were not weathering the storm. Some would call it contagion to the America mortgage problem but the issues ran much deeper with real economies that slowing fast. Like the US, confidence by consumer and business has fallen off cliff.

With rates higher than the US and economies in worse shape, the only action has been to cut rates aggressively and catch-up. The ECB has cut rates 50 bps which is in line with expectations. The BOE took a 150 bps cut which is 100 bps greater than what was expected by the market.

Surprisingly, the FTSE and Euro Stoxx indices are down after the announcement. The information has been digested as further evidence that the economy in England is in much worse shape than anyone imagined.

Even good information of monetary help is being perceived as bad news.

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