Italy versus Spain

October 30, 2013

Italy will auction up to 6 billion euros of five- and 10-year bonds after two earlier sales this week saw two-year and six-month yields drop to the lowest level in six months. Don’t be lulled into thinking all is well.

After Silvio Berlusconi’s failure to pull down the government, Prime Minister Enrico Letta has some time to push through economic reforms, cut taxes and spending. But already the politics look difficult and the central bank said yesterday that government forecasts for 1.1 percent growth next year and falling borrowing costs were overly optimistic.

Bank of Italy Governor Ignazio Visco and Economy Minister Fabrizio Saccomanni will speak during the day.

Italy’s three main unions are to strike over the government’s 2014 budget plan, which itself is only a modest first step to putting the economy back on track. Former premier Mario Monti resigned as head of his centrist party after it supported the budget which he viewed as too timid, and the centre-right PDL, which makes up a fractious coalition government with Letta’s centre-left, is objecting for different reasons.

There’s a lot of data to wade through with Spanish third quarter GDP, just out, confirming that fragile 0.1 percent growth has put an end to nine successive quarters of contraction. So far any signs of recovery have been rooted in increasingly competitive exports but yesterday Spanish retail sales rose for the first time since June 2010.

The year-on-year rise, after 38 consecutive monthly falls, is a first sign that domestic demand might be returning though the figures were skewed upwards by a rise in value-added tax in September last year which curbed consumer spending then. Perspective: with an unemployment rate above 25 percent and wages have fallen dramatically, few Spaniards will be feeling much better.

German unemployment and inflation for October are more likely to be market movers although all investor eyes are really on the Federal Open Market Committee’s policy announcement late in our day. Belgium’s economy is expected to have grown by 0.3 percent in the third quarter.

One of the weaker points of Europe’s weak recovery is the continuing stagnation of bank lending, particularly in the bloc’s periphery. The European Central Bank’s latest lending survey, due at 0900, is unlikely to change that picture.

We have a clutch of ECB speakers, aside from Visco, notably Vitor Constancio, Jens Weidmann and Joerg Asmussen and Portuguese central bank Governor Carlos da Silva Costa. As we reported yesterday, there are three trains of thought within the ECB about what policy move, if any, to make next.

The strengthening euro has become a live issue since it could choke off a fledgling recovery and push inflation dangerously low. Some policymakers want to consider an interest rate cut, some to keep the option open of another long-term liquidity splurge for the banks a la last year’s LTRO (which looks like an odd choice of weapon to take on a climbing currency), and others in  the “core” euro zone don’t want any policy shift at all.

Austria’s Ewald Nowotny came out publicly yesterday saying he saw no good tool the ECB could use to curb the euro. He’s probably right since this is more to do with dollar weakness which might be remedied whenever the Federal Reserve does get round to slowing the pace of dollar-printing (next year now?).

The other perennial for the ECB is the very much incomplete banking union with rigorous stress tests looming next year.
We are interviewing European Commission President Jose Manuel Barroso and yesterday EU financial markets chief Michel Barnier told us the European Commission could agree to lower the number of banks that come under cross-border supervision, to assuage Germany concerns about a single resolution authority having the power to shut down its small local banks.

The biggest spoke in the euro zone’s wheel is the continuing absence of a German government, more than a month after Angela Merkel won elections but fell just short of an overall majority. Merkel’s conservatives and the centre-left Social Democrats hold their second official meeting on forming a ‘grand coalition’. Smaller working groups are thrashing out policies in areas such as finance, energy, labour. Each Wednesday the 75 negotiators from both camps will meet to assess progress. We’re not expecting a puff of white smoke until December.

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