Good day… And welcome to another week, the last one in August! The weather here in St. Louis has shifted toward fall, which is my favorite season. Chuck is flying back home from San Francisco today and will be back in the saddle tomorrow. Both he and the big boss, Frank Trotter, sent me some great Pfennig pfodder over the weekend so lets get right to it.

The dollar continued to drift lower throughout the trading day on Friday, with the commodity currencies of Australia, South Africa, and New Zealand leading the way. Confidence is returning to the markets, and investors are once again moving out of the ’safe havens’ of the Japanese yen and US dollar. The reports coming out of Jackson Hole indicate that central bankers believe chances for near-term growth appear good and recent data seem to support this conclusion.

European industrial orders increased more than economists forecast in June rising 3.1% from May. This was the largest gain in over a year and a half, and is the latest sign that the European economy is starting to climb back out of recession. But many economists question the strength of the recovery, saying the pick up in economic growth was mainly due to government programs. ECB President Jean-Claude Trichet sounded cautious after the report. “We see some signs confirming that the real economy is starting to get out of the period of freefall,” Trichet said in Jackson Hole. But this “does not mean at all that we do not have a very bumpy road ahead of us.”

The home sales data released in the US on Friday were surprisingly strong, with existing home sales increasing 7.2% month on month. We get a bit of a break in the data releases today with just the Chicago Fed index; but the rest of the week will give us plenty of data to digest. Tomorrow we see the S&P/CaseShiller housing data, US consumer confidence, and ABC consumer confidence numbers. Wednesday will bring Durable Goods orders along with New Home sales. Thursday will give us another look at the estimate for 2nd Quarter GDP here in the US along with the weekly jobless claims. And we will close out the week on Friday with the release of Personal income and spending for July.

Should be a busy week ahead, and I would expect for most of the data out of the US to continue to confirm a government led recovery is underway here in the US. In particular, the consumer spending and durable goods orders should show a nice uptick on the back of the cash for clunker program. But Chuck sent me a note over the weekend which questions the ’success’ of this program. Is it really what the US economy needed? Here are Chuck’s thoughts from San Francisco:

“I was sitting here thinking about something that had flashed across the TV screen here in my room, and that is the “Cash for Clunkers” program… I blasted this program two weeks ago, and now that it’s finally done with and $3 Billion was spent to artificially boost auto sales, I will put my final thought on this… Of course I already talked about the obvious things wrong with this program. But here’s my final thought, and that is… I believe the program is going to end up hurting the most vulnerable consumers in the U.S. Middle Class buyers, traded in their “paid for” cars, and leveraged up to buy a new car, when they probably shouldn’t have done so, given the rot on the economy’s vine.

So… Once again, I’m reminded of the words that President Reagan said were the scariest words that could be spoken… “I’m from the government, and I’m here to help”…

The reason I’m all over this program today like a cheap suit, is that this weekend, I heard that Big Ben Bernanke made a claim at the Jackson Hole boondoggle, that “we saved the world”… Oh, Come on Big Ben, isn’t that just a bit dramatic? Does this statement have anything to do with the fact that you are up for re-appointment in January, and you would love to have that thought of you “saving the world” on the minds of the administration?

So… In the end, we’ll see if “he saved the world”…”

I’m with Chuck on this one. It seems the US government is intent on getting consumers to go back to their borrow and spend habits. This is what created the bubbles, and the administration seems intent on creating another bubble economy. US consumers have made some historic cut backs on the amount of debt they are amassing (whether or not these cutbacks are by choice). The US government should not be encouraging these consumers to go back to their previous ways, but should instead be trying to use the funds to educate and train consumers and to encourage new and innovative companies. Use this downturn to correct some of the bad habits which we had gotten into. Yes, it will be painful, but breaking an addiction is always hard and painful. US consumers need to break our addiction to easy credit and massive debt. This recession/depression has given consumers a much needed wake up call, hopefully the administration won’t be able to push consumers back into their old habits.

I went running with my wife and her friends over the weekend (trying to take it easy on the back) and got into a discussion about the US economy. One of my wife’s friends had heard an interview on MSNBC in which an economist stated we were in a classic V shaped recovery. I let her know that I think the economist was one letter off, and that instead we will see the recovery shaped more like a W. The green shoots and recovery we are seeing right now will die out as government stimulus slows. High unemployment, a long slow housing recovery, commercial real estate woes, and rising personal bankruptcies will force the economy into another dramatic downturn. Central banks who have ‘juiced’ their economies with unlimited credit will have to decide whether to continue juicing, or pull back from the table.

Nouriel Roubini wrote a commentary in today’s Financial Times which agrees with my thoughts. Roubini said the chance of a double dip recession is increasing because of risks related to ending global monetary and fiscal stimulus. He believes the global economy still has further to fall, and will bottom out sometime during the second half of 2009. While some economies such as China, Germany, Australia, and France will likely recover; others such as the US and UK will double dip with another leg down. “There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote. “Policy makers are damned if they do and damned if they don’t.”

Oil traded up to a 10 month high over the weekend, and carried the commodity based currencies of Canada, Mexico, Norway, and Australia with it. Oil will continue to run up as confidence in a global recovery strengthens. Another factor which has helped boost demand for Australian dollar investments was a move by the Aussie govt. which removed interest withholding tax on federal government securities. This made these investments more attractive and spurred additional demand for the currency.

The Hungarian central bank will meet today and is expected to cut their benchmark interest rate. Rates in Hungary are the highest in the European Union, and lower growth combined with low inflation will spur the cut. The Hungarian forint weakened from the strongest level in a week on the interest cut speculation.

The dollar’s role as the world’s reserve currency has been a continued topic among scholars and was undoubtedly discussed out in Jackson hole last week. China and Russia have both been adamant about discussing the possibility of moving toward a new reserve system to replace the greenback. Since no single currency is strong enough to replace the dollar in today’s global economy, most discussion has centered around the idea of creating a ‘reserve currency’ which is comprised of a basket of the world’s largest currencies. This idea is supported by Joseph Stiglitz, a Nobel Prize winning economist and Columbia University economics professor. “The dollar’s role as a good store of value is questionable and the currency has a high degree of risk,” Stiglitz said at a conference last Friday. “There is a need for a global reserve system. The currency reserve system is in the process of fraying,” Stiglitz said. “The dollar is not a good store of value.”

Frank Trotter was thinking about the same thing as he sat and watched a musical over the weekend. Frank is a real thinker, and I really enjoy it when I get a chance to have a good economic discussion with him. Luckily for all of you Pfennig readers, he decided to send me a note on his thoughts during the performance. So here they are:

“Went to the touring musical Mary Poppins Saturday night; it’s always great to see a play about a run on a bank. While the books were written in the 1930’s and beyond most of you will remember the Disney film set in 1910 – before the Great War when England ruled the waves and empire was returning untold dividends to the mother country. At that time of course there was no questioning the power, status and earning capacity of the British Empire. As George Banks replies to Admiral Boom in the movie, “Credit rates are moving up, up, up. And the British pound is the admiration of the world.”

Well that was then and this is now. Soon after, in 1914 England suspended the conversion of Bank of England notes to gold for the period surrounding World War I, and the on again off again slide into today’s fiat currency world began. Over the next 100 years England has leaned the lesson of empires that came before. That extending the resources of a country in non-producing capacity leads to the decline of the currency and a fall in the economic power of the country and the economic wellbeing of it’s population. In 1910 it took 4.25 pounds to buy an ounce of gold, and 0.2056 pounds to buy a US dollar. Today of course the price of gold has risen 13,447% for British buyers, while the price of a greenback is only up 195%. We are uncomfortably comfortable in feeling that the carabineers have given way for the good old USA in a parallel fashion.

We’ll freely admit that there has been a slow motion slide going on in the US dollar since establishment, and especially since the removal from the gold standard and the Bretton Woods Agreement in 1971. But we feel even more strongly that the fiscal and monetary policies put in place starting in 2001, accelerating through the 2000’s, and now amplified since January 20th have left us with no legs for our stool. Fiscal policy has been and continues to be out of control. The Federal Reserve policy of the 2000’s created the credit bubble and now stands to create the largest monetary inflation experienced in a first world nation. Both political parties have determined that no one can be an adult in government by slashing spending or raising taxes to cover our exploding gap (mathematically the only two options), and instead are hiding behind the invisible tax of currency depreciation. For a country we conclude that a strong currency is essential to long term well being, and by extension that our government has given up on the dream in exchange for election and reelection.

So what’s to be done? If you are a believer that the political process can sort things out and return our wonderful nation to fiscal prudence and steady governance go ahead and stay the course. For the rest of us who like Margaret Thatcher believe that “the problem with socialism is that eventually you run our of other people’s money”, we’ll be letting our “tuppance safely invested in the bank” seek diversification across the globe in countries and markets with more opportunity and prudence. We couldn’t agree more with the Mary Poppins conclusion, re-written for modern times that “Where stands the banks of [the USA], America stand. Oh, oh, oh, oh! When falls the banks of [the USA], America falls!”

Leave it to Frank to use Mary Poppins to give an economics lesson! And with that, I will close this out and head to the currency roundup.

Currencies today 8/24/09: A$ .8400, kiwi .6845, C$ .9251, euro 1.4308, sterling 1.6492, Swiss .9424, rand 7.7805, krone 6.045, SEK 7.0496, forint 187.60, zloty 2.8755, koruna 17.775, yen 94.86, sing 1.4396, HKD 7.7505, INR 48.5575, China 6.8314, pesos 12.7805, BRL 1.8299, dollar index 78.17, Oil $73.98, 10-year 3.56%, Silver $14.42, and Gold… $953.85

That’s it for today… Thanks to both Chuck and Frank for giving me so much good stuff to include in today’s Pfennig! Kristin Kuchem sent me a note and told me she got stranded in the Chicago airport on her way back from San Fran last night. It is her son Jack’s first day of Kindergarten so she was pretty bummed out that she couldn’t get home to send him off. Flying just isn’t much fun anymore, as the airlines overbook most flights and any kind of weather can royally screw up your best laid plans. Hopefully Kristin can make it back down from Chicago in time to pick Jack up from school. John Smoltz had an impressive first outing for the Cardinals yesterday, setting a club record with 7 strikeouts in a row! Sure looks like this is going to be a fun October here in St. Louis. Hope everyone has a Marvelous Monday and a great start to your week!

Source: European orders support the Euro

Good day…The dollar continued its assault on the world’s currencies yesterday as the dollar index moved above the 74 handle. I pulled a chart off the Bloomberg on my way out the door last night, and it showed the only major currency which was up vs. the US$ yesterday was the Swedish krona, which managed a .07% increase. This dollar rally has legs, but I still question the fundamentals behind the dollars surge. Today may be the day we see the dollar finally make a turn, as the ECB will be announcing their rate decision.

It is not that I expect Trichet to raise rates, but I do expect him to sound hawkish and refocus the markets attention on Eurozone inflation and away from worries about growth. Two reports out of Germany this morning will bolster Trichet’s hawkish stance. German exports rose more than economists expected in June, defying a stronger euro and pushing the trade surplus to a record. Exports increased 4.2% from may, the most since September 2006. German industrial production also increased for the first time in four months with output rising 1.7% from a year earlier. The IMF last month rose its forecast for German economic growth this year and said the global slowdown linked to the US financial crisis was less severe than it expected.

The entire global economy has been dealing with commodity price inflation, but so far this raw material price spiral hasn’t spilled over to wage pressures. While the severe slowdown in the US economy won’t allow increases in wages, the European economy isn’t in as bad of shape. Lufthansa, Germany’s largest airline, just announced a 5.1 percent raise to settle a strike. And Lufthansa employees aren’t alone in securing inflationary pay deals in Germany. Negotiated wages jumped 3.5% in the year through April, the biggest gain in 12 years. This wage spiral will keep the ECB focused on inflation, with another interest rate increase possible. ECB council member Klaus Liebscher signaled there may be need for still higher borrowing costs in Europe, saying in a July 24 interview that “we haven’t exhausted our room for maneuver”.

The euro rallied against the dollar in early European trading on speculation European policy makers will continue to hold their tightening bias. One of the reasons for the spike in the value of the US$ has been a shift in interest rate expectations. During the past month, several currency traders have begun to speculate that the next move by the ECB would be a drop in interest rates, while they gambled that the next move by FOMC would be up. Recent data would suggest these speculations could be completely wrong. The economic downturn looks like it will continue in the US, keeping the Fed from lowering rates, while the ECB is dealing with a stronger than expected European economy, and spiraling wage pressures. A change in these interest rate expectations could put the dollar back on its long term trend down, and send the Euro back to $1.60 or above.

The Bank of England kept the main interest rate unchanged for a fourth month as they find themselves in the exact same position as our Federal Reserve. Inflation has been accelerating, and the economy is teetering on the brink of a recession. UK housing prices dropped the most in a quarter-century and UK services, manufacturing, and construction all shrank in July. So the economy is dramatically slowing while inflation is predicted to more than double the 2% target. BOE policy makers split three ways on which direction interest rates should move, so their only choice was to just leave them where they are. England’s economic situation has left the BOE as impotent as the FOMC!

As I mentioned above, the UK reported that house prices fell at a rate of 8.8% in July. This morning we will get a better picture of the current status of the US housing market. A report from the National Association of Realtors will probably show its index of home sales fell for another month. The inventory of unsold homes in the US stands at the highest level ever recorded. And according to economists, the inventory of existing homes and condos must fall by almost 50 percent for prices to stabilize. Theres is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005. Almost one of every 10 US mortgages was in trouble during the first quarter according to the Mortgage Bankers Association.

Those that want you to believe the ‘worst is over’ in the US economic downturn only need to look at the pending home sales numbers, which is usually seen as a leading indicator. The index of pending home resales is expected to have fallen 1% after a decline of 4.7% in May. As we have been reporting for some time now, the falling housing market has far reaching effects on the US economy. While the folks at CNBC have been telling everyone that the worst is over after Paulson and Bernanke came to the rescue of Fannie and Freddie, some very smart people (whom I agree with) are warning that losses will continue to mount.

Nouriel Roubini, the New York University professor who predicted more than two years ago that the US would fall into a recession because of the bursting of the housing bubble and rising energy prices is one who disagrees with CNBC. Ty Keough pointed out an interview with Roubini which appears in this week’s Barron’s. I would encourage any of you who are starting to ‘drink the Kool-aid’ being pushed by Paulson and Bernanke to read it. In the interview, Roubini predicts that we are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. He goes on to say we can expect a total of $2 Trillion of debt related losses in our financial institutions. Roubini states that banks have only started to feel the effects of the housing downturn, and that consumer-credit losses and home-equity loan write offs will substantially add to their pain.

He ends the interview with this: “Leaving aside the fact that we are going to have a pretty nasty recession and international crisis, the global economy is going to grow at a sustained rate once this downturn is over. There are significant financial and economic problems in the US and that’s why I’m bearish about the US. But the emergence of China and India and other powers is going to shift global economics and politics radically, and the world is going to be more balanced in the future, rather than relying on one engine, which has been the US. ..I’m quite bullish about the state of the global economy..”

I agree with Roubini’s take on things, and the best way to protect your portfolio? International diversification. Keep a portion of your assets outside of the US$ in currencies and precious metals. Investors should view this dollar spike as an excellent opportunity to purchase currencies and metals at cheaper prices, dollar cost averaging to get your overall costs down.

Japan’s government said the economy is “deteriorating,” acknowledging for the first time that the country’s longest postwar expansion has probably ended. “There is a high possibility the economy has entered a recession,” the head of business statistics at the Cabinet office said in Tokyo today. The Japanese yen continues to come under pressure due to the weakening economy and the recent move back into carry trades. In these carry trades, investors borrow currencies at low interest rates, sell them and invest the proceeds into higher yielding investments, earning the ‘carry’. With market volatility easing over the past month, many investors have moved back into these carry trades, pushing the value of the funding currencies of Japan and Switzerland down. As in the past, these carry trades can be reversed as quickly as they are put on.

Just in, the ECB left rates unchanged. Now we just have to wait Trichet’s press conference, which will occur in about 45 minutes. Better get to the currency roundup:

Currencies today 8/7/08… A$ .9106, kiwi .7178, C$.9546, euro 1.5468, sterling 1.9517, Swiss .9474, ISK 79.83, rand 7.4390, krone 5.1734, SEK 6.0846, forint 151.84, zloty 2.0966, koruna 15.54, yen 109.45, baht 33.58, sing 1.3837, HKD 7.8054, INR 42.06, China 6.8643, pesos 9.9398, BRL 1.5775, dollar index 74.08, Oil $120.17, Silver $16.60, and Gold… $882.40

That’s it for today… Chuck traveled out to San Francisco to speak at the money show. This is the first time in several years that I won’t be there, but things are just too busy on the desk as of late. I got to see Chuck at the Cardinal game the other night, and he was excited about getting back out to San Fran and addressing the crowds. I guess Brett Favre is headed to New York. I used to really like him, but this latest move dropped him a few notches in my book. Albert Pujols hit a Grand Slam last night to propel the Cards to another win. Maybe we will have post-season baseball in St. Louis! Hope everyone has a Tub-Thumping Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

Source: ECB to Change Dollar’s Direction?…

President Nixon instated price controls on the 15^th of August, 1971. Inflation was a little over 4% at the time. Price controls manifestly did not work (resulting in shortages of all sorts and a deep recession) and were rescinded a few years later. President Ford went to Congress with programs to fight inflation that was running closer to 10% in October of 1974, with a speech entitled “Whip Inflation Now” (WIN). He famously urged Americans to wear “WIN” buttons. That policy too was less than effective, and the buttons, in a history replete with silly gestures by governments, should stand on anyone’s top ten list of such silly gestures.

Cynics more thoughtfully wore the buttons upside down and said the inverted letters (which looked like NIM) stood for “No Immediate Miracles.” They were right. There was no miracle, just eventual pain and lots of it. Ultimately, Paul Volker defeated inflation, but at the cost of two serious recessions and a lot of economic misery, with unemployment levels over 10% for nine months in 1983.

This week we were given the data that inflation as measured by the Consumer Price Index (CPI) over the last year was 4.2% and unemployment is now 5.5%. Some call for the Fed to raise rates so that we do not have to experience another lost decade like the ’70s and then ultimately see some future Volker forced to raise rates and drive unemployment back to 10%. Others suggest that “core” inflation is what should be paid heed to, and urge caution.

This week we look at the cost of what could be a renewed effort to Whip Inflation Now, not just here but in countries worldwide. Will Trichet in Europe raise rates even as the European economy seems to be slowing down? If you think inflation is bad in the US and Europe, take a peek at Asia. And I ask, “What will Ben do?” It should make for an interesting letter.

Whip Inflation Now

Nixon and his advisors thought inflation at 4% was serious enough to institute price controls. Headline inflation in the US is now 4.2%. What kind of economic policy should we pursue to bring inflation back into the Fed’s comfort zone of 1-2%? Would it work and would it be worth the pain? To get a handle on the question, let’s go to the data from the Bureau of Labor Statistics and see where inflation is coming from.

And let me note, this is the same exercise we could do for a host of countries. The answer will be roughly the same: there are no easy solutions.

Core inflation, or inflation without food and energy, grew at 2.3%. Inflation without food costs was an even 4% and without energy was 2.7%. Clearly energy was the leading contributor to inflation in the past year.

But the recent trend in rising inflation is even more worrying. If you look at just the last three months of data and compute an annualized rate of inflation, you find that overall inflation has risen to 4.9%, energy inflation is running at a staggering 28%, and food costs have risen 6.2%. Meanwhile, core inflation during that period dropped to 1.8%. You can see all the data at http://www.bls.gov/news.release/cpi.nr0.htm.

Now, gentle reader, let’s think about these numbers. Food (over 14%) and energy (over 9%) combined make up roughly 24% of the CPI, yet were responsible for over 60% of the recent three-month trend in inflation. By the way, housing was up 4.9% and transportation up 8.7%, so it was not just food and energy.

What would it take to drop headline inflation back to under 2%? Well, one way would be for food and energy prices to fall. Let’s look at the possibilities.

As Donald Coxe has noted, North America has had an 18-year run of remarkably good weather in our growing season. You have to go back 800 years to get a string of years that were that good. Yet today food reserves of all types are at decades-long lows. There is very little room for any type of problem.

This growing season is not off to a good start. It looks like the yield on the corn crop will be lower than normal, and that is if we get very benign weather this fall. Given how late much of the US corn crop was planted, and how torrential rains in the corn belt have devastated crops (not to mention flooding cities, and our thoughts and prayers go out to those who have lost their homes to flooding), an early frost would be disastrous.

Because we have devoted so much of our arable land to corn (in a very misguided policy to turn food into ethanol), we have less for soybeans, which is putting upward price pressure on beans and other grains that are used to feed cattle, hogs, chickens, etc. In fact, it costs so much to feed livestock that ranchers are shrinking their herds.. This means more meat is coming into the system now, which is dampening prices. Increased supply will reduce prices in the short term, but next fall we will find that supplies of all types of meat will be short. That will potentially send meat prices soaring. Cereal and bakery products are up 10% over the last year. They could continue to rise in the fall if the corn crop does not yield more than currently projected. It will cost even more to feed your household and feed the animals we need for meat.

Food is the most basic of commodities. Demand is fairly consistent, and supplies may come under pressure. Looking for food inflation to drop back by the fall to 2% is not realistic in the current environment.

What about energy? There is some more hope there, at least on the oil front. High prices have reduced demand in the US, with gasoline usage down about 4%.

I think we have reached a tipping point. The psyche of the US consumer has been permanently scarred. Slowly, this country is going to replace its fleet of cars with smaller, more fuel-efficient cars. Over time, we will see demand continue to fall. We could see further drops in the demand for gas in the next few months.

Much of Asia used to subsidize oil prices to their consumers. That is changing, as Indonesia, Sri Lanka, and Taiwan have announced they are decreasing their subsidies, as the cost is simply too much. Malaysia now spends 25% of its budget on oil subsidies, and must raise prices or cut other services – or watch inflation get worse. India is now contemplating how to cut its subsidies. Even China is likely to start to raise costs after the Olympics. These countries are going to go through their own price shocks. All this will reduce world demand for oil.

Gross domestic product (GDP) in the 15-country Eurozone increased by 0.7% in the first three months of the year, Eurostat reported. Analysts had predicted a growth rate of 0.5%.

Germany and France – which together account for nearly half the Euro region’s GDP – made the difference. The German economy, the continent’s largest, expanded by 1.5% in the first quarter, compared with a growth rate of 0.3% in the final three months of 2007. France also turned in a respectable performance, advancing at a 0.6% clip.

Although the strong growth underscores the global economy’s resilience in the face of a sputtering U.S. economy, and appears to justify the European’s Central Bank’s focus on taming inflation, analysts warn the celebration may not last.

A key cause for concern: Despite their strong performance, both France and Germany showed signs of declining consumer demand, which is why analysts are skeptical that such stellar growth can continue.

“A Chinese proverb says that it is better to light a candle than to curse the darkness,” Carsten Brzeski, an economist for Dutch finance group ING Groep NV (ADR: ING), told Reuters.” However, at the current juncture, one should not be blinded by the German GDP numbers.”

Indeed, earlier this month, data from Germany’s Federal Statistics Office showed retail sales in March were down 0.1% from February, and down 6.3% from a year earlier. Food, drink, and tobacco sales led the decline, as consumers cut back in the face of soaring inflation.  Consumer prices in April jumped 2.4%.

The story is the same for a multitude of other European nations. Eurozone inflation backtracked slightly in the month of April, sliding to 3.3% from a 16-year high of 3.6% in March, but remained well above the ECB’s 2.0% ceiling.

“There are significant pressures facing consumers in Europe,” Howard Archer, chief European economist at Global Insight Inc., told Forbes.com. “Higher inflation and soaring food prices are weighing down on consumer purchasing power in Europe. It is a depressing factor throughout the continent.”

“Consumer confidence is weak in Europe and low spending is bound to hurt the overall economy,” he added.

The European Central Bank (ECB) has remained hawkish on inflation, which it considers “the main problem that we have to face in the short term.” The ECB has held its benchmark interest rate steady at 4.0% for nearly a year now, despite an aggressive string of rate cuts by the U.S. central bank that has left the benchmark Federal Funds Rate at 2.0%.

Still, rising worldwide commodities prices and a weak U.S. dollar continue to drive up inflation throughout the Euro region.

The European Commission (EC), the executive branch of the European Union, said last month that Eurozone growth would continue to erode throughout 2008 and 2009.

The EC predicted the combined growth rate for the 15 countries that use the euro would slow to 1.7% this year and 1.5% next year. It was second time in six months that the commission has reduced its growth estimate for the region. In November the group was projecting growth of 2.2%.

According to the EC, “the recent sharp rises in food and energy prices have depressed households’ purchasing power and consumer spending in the last quarter of 2007 and are expected to continue to do so during most of 2008.”

If the Eurozone does lose its momentum in the months ahead, the ECB could find itself in a precarious position, as abiding inflation might keep the bank from cutting rates to spur growth.

“There is definitely no room for the ECB to cut rates,” Joerg Kraemer, chief economist at Commerzbank AG (OTC: CRZBY) in Frankfurt told Bloomberg News.

Source: European Growth Strong in the First Quarter, but Will it Last?