German Producer Prices are expected to have contracted -1.3% in the year to April, the most in nearly 7 years. Falling wholesale inflation foreshadows continued downward pressure on consumer prices as lower manufacturing costs are passed on via cheaper finished products. The annualized inflation rate fell to the lowest level in a decade in March and although prices rebounded a bit on Easter-linked spending and currency depreciation in April, the risks surely remain to the downside as deepening recession compounds lower input costs. Indeed, the danger going forward is that continued weakness in economic growth both at home and abroad will encourage expectations of deflation, a scenario that would substantially compound the downturn by encouraging consumers and businesses to perpetually hold off on spending and investment to wait for the best possible bargain. For their part, the European Central Bank has continued to lag in offering aggressive monetary easing on par with their counterparts in the US, UK and Japan. Although ECB President Jean-Claude Trichet announced that the bank would move forward on quantitative easing with a scheme to “purchase euro-denominated covered bonds issued in the euro area,” details of the program (and thereby its actual commencement) have been delayed at least until the next policy meeting on June 4th. Such waffling may see the Euro punished as traders price in a longer path to recovery.

Minutes from the last meeting of the Bank of England are also on tap, with traders anxious to get a glimpse into the dynamics behind policymakers’ surprise decision to expand quantitative easing (QE) programs by 50 billion pounds. On balance, the impact of the release may prove to be on the muted side of things considering the markets have already had an opportunity to price in a very dovish BOE after last week’s quarterly inflation report revealed that the bank expects inflation to remain below the target 2% until 2012 as the economy takes a slow path to recovery from the current downturn. Indeed, yesterday’s weak CPI report failed to hold back the currency. Still, selling pressure could emerge if it is perceived that the last QE boost was one in a series of expansions that will continue in the medium term.

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