More cracks are appearing in the foundation of Eurozone fundamentals. The December PMI composite was revised down to a paltry 38.2 and is down from 38.9 in November and 43.6 in October. Indeed, the deterioration in this index is commensurate with the slowdown in the US ISM manufacturing and services indices - and we all know how dire the prospects for US growth have become. It wasn't merely business that was downbeat either, as consumer confidence plunged to its lowest level on record in December, dropping to -30 from -25 the prior month. This took out the previous low set back in 1993 when the global economy was still reeling from the US Savings & Loan crisis. These forward looking confidence metrics clearly point to more economic pain ahead in the Eurozone. Lastly, today saw Nov. EZ industrial production fall further, dropping from -5.7% YoY to a new low at -7.7%, auguring poorly for Dec. IP.

Talk out of the ECB members also suggests rate cuts are in the offing. The most compelling comments were those from ECB Vice President Papademos and council member Constancio. Both said that the central bank may need to reduce rates if inflation falls below the target 2.0% rate. Well wouldn't you know that the CPI inflation estimate for December plunged to 1.6% from 2.1%, the lowest level since October 2006. This result will leave many of the more hawkish ECB members hard pressed to argue that inflation remains a risk near-term. If that isn't enough, ECB President Trichet reportedly indicated that recent data could prompt a rapid response from the ECB to combat the dire state of the economy and use some ammunition it has been saving in case downside risks materialize. Clearly, the evidence points to an ECB that is ready to act.


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