MacroScope

Italy versus Spain

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.

Beware the bias in euro zone forecasts (again)

Next time you ask an economist a question about the euro zone, be sure to enquire where their head office is based.

London? New York? Expect a pessimistic response on euro zone matters.

Frankfurt? Paris? Happier days are coming soon for the currency union.

So that’s oversimplifying matters slightly – but as we’ve seen time over, institutions based outside the euro zone are likely to be gloomier about its prospects, and those based inside it are more likely to look on the bright side.

That pattern was clear to see in this week’s Reuters poll on the euro zone’s vulnerable quartet – Greece, Ireland, Portugal and Spain.

Forward guidance not banking on Scottish independence

There are many unknowns surrounding a Scottish vote in favour of independence at next year’s referendum, a potentially huge event for the British economy. But one that has attracted little attention is what it would mean for UK interest rates.

As part of its forward guidance policy, the Bank of England has promised that it will not consider raising rates from record-low levels until unemployment in the UK – 7.69 percent at the most recent reading – falls to 7 percent. It expects this to happen in late 2016, though some investors think the jobless rate could fall much quicker.

The question is, what would happen to Britain’s unemployment, and consequently interest rates, if Scotland decided to leave the UK? Recent data suggest it would take longer for unemployment to hit the Bank’s threshold and prolong the era of cheap money.

Spanish sums

Spanish third quarter GDP figures tomorrow are likely to confirm the Bank of Spain’s prediction that the euro zone’s fourth largest economy has finally put nine quarters of contraction behind it, albeit with growth of just 0.1 percent.

Today, we get some appetizers that show just how far an economy with unemployment in excess of 25 percent has to go. Spanish retail sales, just out, have fallen every month for 39 months after posting a 2.2 percent year-on-year fall in September, showing domestic demand remains deeply depressed. All the progress so far has come on the export side of the balance sheet.

Spain’s public deficit figures, not including local governments and town halls, are also on the block. The deficit was 4.52 percent of GDP in the year to July and the government, which is aiming for a 6.5 percent year-end target, says it is on track.

Romer, taking aim at Fed, advocates ‘regime change’ and a shift to nominal GDP

By Alister Bull

photo

Christina Romer, former chair of the White House Council of Economic Advisers and a strong advocate for Janet Yellen to take over from Ben Bernanke as the next chair of the Federal Reserve, slammed the Fed in a lecture last week that accused the U.S. central bank of being too meek and of fighting the wrong battle by being fixated on asset bubbles.

Romer, sometimes touted as a potential candidate to fill one of the 3 vacancies on the Fed’s Board in Washington, or maybe run a regional branch (Cleveland has an opening), also discussed deliberately aiming for 3 or 4 percent inflation, as well as targeting nominal GDP.

One key observation from her remarks was central banks must tackle financial instability head-on. The Greenspan-era disdain for using monetary policy to burst asset bubbles has become a luxury which the post-crisis world can no longer afford:

As Brazil reopens gates to capital inflows, foreign bond purchases jump

Despite all the market talk about Brazil’s frustrating performance over the past few years, Latin America’s largest economy remains a top destination for global funds in at least one area: fixed income markets.

Foreign purchases of local debt have jumped since June, when Brazil, shaken by prospects of higher market interest rates in the United States, scrapped a key tax on foreign investments in local bonds.

Monthly inflows to local bonds and other fixed-income instruments traded onshore soared to an average of $6 billion between June and September, from just $0.8 billion in the first five months of the year, according to the chart below based on central bank data released on Friday:

The Italian Job

Italy has dropped out of the spotlight a little following the protracted political soap opera surrounding Silvio Berlusconi. But it remains perhaps the euro zone’s most dangerous flashpoint.

Prime Minister Enrico Letta now has some time to push through economic reforms, cut taxes and spending in an effort to galvanize activity. But already the politics look difficult.

Italy’s three main unions are to strike over the government’s 2014 budget plan. Former premier Mario Monti resigned as head of his centrist party after it supported the budget which he viewed as way too modest, lacking in meaningful tax cuts and deregulation.

UK recovery, can you feel it?

Third quarter UK GDP data are likely to show robust growth – 0.8 percent or more, following 0.7 percent in Q2 – more kudos to a resurgent finance minister George Osborne who only a year ago was buried in brickbats.

We can argue about the austerity versus growth debate ‘til the cows come home – there is still a strong case that if the government hadn’t cut so sharply, growth would have returned earlier and debt would have fallen faster. But the fact that the economy is ticking along nicely 18 months before the next election means Osborne has won the argument politically.

And yet, and yet. The opposition Labour party has been nimble in switching its criticism from the government’s debt-cutting strategy to the fact that the economy might be recovering but the vast majority of Britons aren’t feeling it.

Humdrum summit

A two-day EU summit kicks off in Brussels hamstrung by the lack of a German government.

Officials in Berlin say they want to reach a common position on a mechanism for restructuring or winding up failing banks by the end of the year but with an entire policy slate to be thrashed out and the centre-left SPD saying the aim is to form a new German administration with Angela Merkel’s CDU by Christmas, time is very tight.

On banking union, a senior German official said Berlin had no plans to present an alternative plan for how a resolution fund might work at the  summit and reiterated Berlin’s stance that national budget autonomy for winding up banks could not be outsourced.

Stress, stress, stress

The European Central Bank will announce the methodology which will underpin the stress tests of about 130 big European banks next year.

It is caught between the devil and the deep blue sea. Come up with a clean bill of health as previous discredited stress tests did and they will have no credibility. So it is likely to come down on the side of rigour but if in so doing it unearths serious financial gaps, fears about the euro zone would be rekindled and there is as yet no agreement on providing a common backstop for the financial sector.

France, Spain and Italy want a joint commitment by all 17 euro zone countries to stand by weak banks regardless of where they are. Germany, which fears it would end up picking up most of the bill, is worried about the euro zone’s rescue fund, the European Stability Mechanism, helping banks directly without making their home governments responsible for repaying the aid.