MacroScope

Of euro budgets and banks

Euro zone finance ministers meet today and will have one eye on budgetary matters given a Tuesday deadline for member states to send their draft budgets to the European Commission for inspection, and with protracted German coalition talks keeping other meaningful euro zone reform measures on hold.

Most draft budgets are in but we’re still waiting on Italy and Ireland. Dublin will unveil its programme on deadline day. Italy’s situation is more fluid so we may get something today.

Over the weekend, Dublin said it may quit its bailout by the year-end without any backstop in the form of a precautionary credit line. That would rule it out for ECB bond-buying support, which it probably also doesn’t need. But it needs at least the 1.8 percent growth forecast for next year to keep bearing down on debt.

Meanwhile, we got hold of documents showing Italy plans to give banks and insurance companies more speedy tax breaks on loan losses and writedowns to help them to clean up their balance sheets and get lending again.

For Rome, the aim is to agree a 2014 budget that cuts labour taxes but also meets the 3 percent of GDP deficit limit. Taxes and social contributions paid by Italian firms are among the highest in the world.

Stocks to rise? 85 percent say yes – as ever

Even a government shutdown and the prospect of an unprecedented U.S. government default – no matter how small – couldn’t shake the conviction among equity analysts that stock markets only have further to rise.

Published on Tuesday, the latest Reuters poll collected more than 450 points of data from hundreds of analysts worldwide on how 20 of the world’s biggest stock markets will perform from now until the end of the year.

Some 85 percent of forecasts predicted a positive return for stock markets between now and end-December. Thursday brought firming hopes of a  deal to ensure the U.S. does not default on its debt, and global shares have lifted for a second day on Friday. That strong consensus could well prove correct.

Yellen selection no surprise to Reuters poll readers

President Barack Obama nominating Janet Yellen to head up the U.S. Federal Reserve came as little surprise to market watchers who read Reuters polls.

The current vice chair of the central bank was the clear frontrunner in two polls of economists, conducted by Reuters in June and August, to succeed Ben Bernanke when his term expires early next year.

All bar four of 44 economists polled in June thought she would take over although that decisiveness had slipped by August, when eight respondents changed their minds.

This little piggy went to market

Italy and Spain are both set to launch syndicated bond sales today, taking advantage of temporarily benign market conditions and maybe with a weather eye on the U.S. debt stalemate which could soon throw the world’s markets into turmoil with an Oct. 17 deadline fast approaching.

After Silvio Berlusconi’s failure to pull down the government, Italy’s political crisis is in abeyance for now and its bond yields have eased back. Spain has issued nearly all the debt it needs to this year already.

It’s not quite “crisis what crisis” but the news flow has been largely positive:
- Portugal (after its own self-inflicted  political crisis over the summer) has seen its borrowing costs fall to their lowest in more than a month after its EU/IMF lenders said it was meeting its bailout goals.
- Greece is predicting an end to six years of recession in 2014 and, just as importantly, a primary surplus.
- And the IMF yesterday predicted Italy, Spain, Portugal, Greece and Ireland (which will soon become the first euro zone member to exit its bailout programme) would all grow next year.

Time for Fed to rethink its forward guidance?

Federal Reserve officials have largely acknowledged by now that leading markets to believe the central bank would reduce its bond buying stimulus in September and then failing to do so was a communications blunder.

For Zach Pandl, a former Goldman economist now at Columbia Management, this means the Fed may have to reshape its guidance to financial markets – even if the exact contours of the changes remain unclear.

Last month’s surprise may have increased the odds that the committee will rework its forward guidance in some way (though this will depend importantly on the identity of the next Fed Chair).

Right time to pump up UK housing market?

The British government is poised to announce the extension of its “help to buy” scheme for potential home owners.

As of today, any buyer(s) of a property up to a value of 600,000 pounds ($960,000) who can put up a five percent deposit, will see the government guarantee to the lender a further 15 percent of the value so a bank or building society will only be lending on 80 percent of the property’s value. Until now, demands for cripplingly large deposits have shut many prospective buyers out of the market.

The big question is whether now – with property prices rising by around 3 percent nationally and by a heady 10 percent annually in London – is a sensible time to be doing this given Britain’s long history of housing bubbles.

Greek turning point?

Greece will unveil its draft 2014 budget plan which is expected to forecast an end to six years of recession.

The draft will include key forecasts on unemployment, public debt and the size of the primary surplus Athens will aim for to show it is turning the corner. The government has said any further fiscal belt-tightening will not bring cuts in wages and pensions and that savings will be generated from structural measures.

If even Greece has passed the worst then maybe the euro zone crisis really is on the wane. The FT reports that billionaire John Paulson and a number of other U.S. hedge funds are investing aggressively in Greece’s banking sector, expecting it to get off its knees – an interesting straw in the wind.

Fed doves strike back


Now that Washington’s circus-like government shutdown has put a damper on hopes for stronger U.S. economic growth going into next year, dovish Federal Reserve officials again appear to have the upper hand in the way of policy commentary.

Take Eric Rosengren, the Boston Fed President who had been unusually quiet as the tapering debate gathered steam. In a speech in Vermont on Thursday, he returned to a familiar theme – the central bank still has plenty of firepower and should not be afraid to use it.

Unfortunately, most of the risks to the outlook remain on the downside. Concerns over untimely fiscal austerity here and abroad, and the possibility of problems once again emerging in parts of Europe, could cause the Federal Reserve to miss on both elements of its dual mandate – employment and inflation – through 2016.

Markets demand a little less conversation, a little more action from Draghi

 

Mario Draghi is patient. More patient than his audience on this sunny autumn day in Paris, where the European Central Bank held its October meeting.

The ECB president, relaxed and at times joking with Vice-President Vitor Constancio and host Banque de France Governor Christian Noyer, sitting to his sides, mastered with ease journalists’ repeated questions about possible policy action.

With inflation hitting a 3-1/2-year low last month and a far cry from the ECB’s target of just below 2 percent, money market rates banks use to borrow from each other tightening and political uncertainty in the euro zone top economies, many had expected to hear some kind of indication for action.

Economic damage from the shutdown? Small to start, say forecasters

The U.S. government shutdown probably won’t hit the economy too hard, say economists. Some point to the fact the shutdown has come right at the start of the fourth quarter, meaning there’s time before the year’s out for the economy to recoup some of  lost output resulting from the downtime. But, the longer it goes on, the worse it will be.

And there is always that debt-ceiling tail risk – the worst-case scenario being that the U.S. Treasury will default on one or more of its obligations. A Reuters poll on Monday put that risk at less than 10 percent.

Here’s a selection of comments from economists on the impact of the shutdown: