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from MacroScope:
Euro zone week ahead
It looks like a week short of blockbusters, particularly today with much of Europe on holiday. But there will be plenty to chew over over the next few days on the state of the euro zone and whether newly-printed central bank money lapping round the world risks throwing things off kilter.
Flash PMIs for the euro zone, Germany and France for May, plus the German Ifo index, follow first quarter GDP data which showed Europe’s largest economy just about eked out some growth but nobody else in the currency bloc did. That trend is likely to be reaffirmed with the harsh winter, having curbed German activity in Q1, allowing for a rebound in sectors like construction in Q2. France and the rest of the pack are unlikely to be so lucky.
For the markets, this leaves all sorts of assets in demand since if the economy worsens, central bank largesse will stay in place for longer and could be enhanced and if recovery finally shows up, well then that’s good for stock markets at least. The only real losers so far have been in the commodities and energy arena. The 500-pound gorilla in the room is how the world economy will cope when the big central banks finally halt and even start to reverse their extraordinary stimulus policies but that looks like a question for 2014 at the earliest. Interestingly, both the IMF and Bank for International Settlements issued warnings about this on the same day.
Ten months after his pledge to save the euro fundamentally changed the dynamics of the currency bloc’s debt crisis, European Central Bank chief Mario Draghi returns to the scene of the crime (I know, that’s the wrong word for all but the hardest hardliners) – London – to deliver a keynote speech. Draghi has said the ECB is prepared to act further if the economy worsens, having already cut interest rates to a fresh record low this month. But what?
from Global Investing:
Weekly Radar: May days or Pay days?
So, it's May and time for the annual if temporary equity market selloff, right? Well, maybe - but only maybe. A fresh weakening of the global economic pulse would certainly suggest so, but central banks have shown again they are not going to throw in the towel in the battle to reflate. The ECB's interest rate cut today and last night's insistence from the Fed that it's as likely to step up money printing this year as wind it down are two cases in point. And we're still awaiting the private investment flows from Japan following the BOJ's latest aggressive easing there.
So where does that all leave us? A third of the way through 2013 and it’s been a good year so far for nearly all bulls – both western equity bulls and increasingly bond bulls too! Not only have developed world equities clocked up some 13 percent year-to-date (the S&P500 set yet another record high this week while Europe's bluechips recorded a staggering 12th consecutive monthly gain in April) , but virtually all bond markets from junk bonds to Treasuries, euro peripherals to emerging markets are now back in the black for the year as a whole. For the most eyebrow-raising evidence, look no further than last week’s debut sovereign bond from Rwanda at less than 7 percent for 10 years or even newly-junked Slovenia’s ability this week to plough ahead with a syndicated bond sale reported to already be in the region of four times oversubscribed. For many people, that parallel rise in equity and bonds smells of a bubble somewhere. But before you cry “QEEEEE!” , take a look at commodities -- the bulls there have been taken a bath all year as data on final global demand hits yet another ‘soft patch’ over the past couple of months.
from MacroScope:
ECB poised to act … modestly
It’s European Central Bank day and we have it on very good authority that a quarter-point interest rate cut is on the cards, which will take rates to a record low 0.5 percent. A plunge in euro zone inflation to 1.2 percent, way below the target of close to but below 2 percent, has cemented the case for action.
In terms of reviving the euro zone economy this is pea shooter and elephant territory. The ECB has consistently diagnosed the key problem that already ultra-low interest rates are not transmitted to high debt corners of the euro zone, where lending rates are much higher and credit restricted. A rate cut won’t change that. It also illuminates the gulf in approach with the Bank of Japan and Federal Reserve who continue to print money at a furious rate.
from MacroScope:
Austerity — the British test case
First quarter UK GDP figures will show whether Britain has succumbed to an unprecedented “triple dip” recession. Economically, the difference between 0.2 percent growth or contraction doesn’t amount to much, and the first GDP reading is nearly always revised at a later date. But politically it’s huge.
Finance minister George Osborne has already suffered the ignominy of downgrades by two ratings agencies – something he once vowed would not happen on his watch. And even more uncomfortably, he is looking increasingly isolated as the flag bearer for austerity. The IMF is urging a change of tack (and will deliver its annual report on the UK soon) and even euro zone policymakers are starting to talk that talk. It was very much the consensus at last week’s G20 meeting.
from MacroScope:
France’s downturn is more significant than you think
The huge downturn in French businesses was by far the most disappointing aspect of this week's euro zone PMIs, which again painted a dismal picture of the euro zone economy.
Maybe it's because grim euro zone PMIs come around with depressingly familiarity these days, but economists on the whole had surprisingly little say about this.
from MacroScope:
Don’t call it a target: The thing about nominal GDP
Ask top Federal Reserve officials about adopting a target for non-inflation adjusted growth, or nominal GDP, and they will generally wince. Proponents of the awkwardly-named NGDP-targeting approach say it would be a more powerful weapon than the central bank’s current approach in getting the U.S.economy out of a prolonged rut.
This is what Fed Chairman Ben Bernanke had to say when asked about it at a press conference in November 2011:
from MacroScope:
Hey brother, can you spare a coupon?
Remember those green shoots? Ever since Fed Chairman Ben Bernanke uttered those words in response to the first signs of recovery from the Great Recession in 2009, many forecasters – including Fed officials – have consistently overestimated the economy’s strength.
Some economists believe 2013 could finally be a break-out year. With the fiscal cliff now in the rear-view mirror and the euro zone crisis apparently stabilized, some see the prospect that growth could actually exceed expectations for the first time in a long while.
from MacroScope:
Still not thinking the very thinkable on Britain’s future
Mark these words. Not only is Britain going to avoid a triple-dip recession, but the economy won’t shrink again as far as the eye can see.
If that sounds ridiculously optimistic, don’t tell the more than 30 economists polled by Reuters last week, none of whom predict even a single quarter of economic decline from here on.
from MacroScope:
100-years of solitude in the euro zone
The euro zone slipped deeper into recession than economists expected in the fourth quarter of 2012 as Germany and France– the region’s two largest economies - shrank 0.6 percent and 0.3 percent respectively on a quarterly basis.
The data is a reminder of the plight still facing the euro zone as it struggles to shake off a three-year debt crisis, which the region has sought to fight with harsh, growth-crimping austerity.
from Global Investing:
Weekly Radar: Glass still half-full?
ECB,BOE,RBA MEETINGS/ US-CHINA DEC TRADE DATA/CHINESE INFLATION/EU BUDGET SUMMIT/EUROPEAN EARNINGS/BUND AUCTION/SERVICES PMIS
Wednesday's global markets were a pretty good illustration of the nature of new year rally. The largest economy in the world reported a shock contraction of activity in the final quarter of 2012 despite widespread expectations of 1%+ gain and this month's bulled-up stock market barely blinked. Ok, the following FOMC decision and Friday's latest US employment report probably helped keep a lid on things and there was plenty of good reason to be sceptical of the headline U.S. GDP number. Reasons for the big miss were hooked variously on an unexpectedly large drop in government defence spending, a widening of the trade gap (even though we don’t get December numbers til next week), a drawdown in inventories, fiscal cliff angst and "Sandy". Final consumer demand looked fineand we know from the jobs numbers (and the January ADP report earlier) that the labour market remains relatively firm while housing continues to recovery. The inventory drop could presage a cranking up assembly lines into the new year given the "fiscal cliff" was dodged on Jan 1 and trade account distortions due to East Coast storms may unwind too. So, not only are we likely to see upward revisions to this advance data cut, there may well be significant “payback” in Q1 data and favourable base effects could now flatter 2013 numbers overall.
