MacroScope

An Italian in Greece

Italian Prime Minister Enrico Letta will be in Athens for talks with Greek premier Antonis Samaras today with (whisper it) the prospect of the euro zone enjoying its first summer lull for years, in fact all the way up to German elections on Sept. 22.

No major decisions are likely before that point and who knows what will come afterwards, though continuity is a better bet than a radical shift.

 The latest poll at the weekend showed Chancellor Angela Merkel’s centre-right coalition lost its lead over the three main opposition parties. Merkel’s conservatives held steady at 40 percent but her junior coalition partner, the Free Democrats, lost one point to 5 percent while support for the main opposition parties remained steady.

It is almost a given that Merkel will still be Chancellor come the autumn, not least because the centre-left SPD will not countenance a coalition with the far left, which commands eight percent of the vote. The crucial question is whether Merkel has to govern with the SPD or not in a grand coalition that could require some policy massaging.

For the euro zone’s major flashpoints – Portugal and Greece – things have calmed a little, for a while at least.
After a messy, self-inflicted political crisis, Portugal’s reshuffled coalition has formally stuck with the measures required by the EU and IMF in return for rescue loans and Greece has adopted the last piece of legislation needed to free the next tranche of its bailout loans today.

India seeks to entice yield-seeking investors in a tapering world

 

India’s concerted effort to shore up the battered rupee over the past two weeks has had one goal in mind: raising currency-adjusted yields to a level where even investors wary of a withdrawal of cheap money from the U.S. would still buy emerging market assets. The central bank has raised overnight money market rates by more than 300 basis points – a spate of tightening not seen since early 2008 – and sharply inverted the swap and the bond yield curve in less than two weeks.

From an offshore perspective, FX implied yields have jumped from a chunky 6 percent last month to well over 8 percent this week. But the risk-reward has not come cheap. For all the pain caused in the world of domestic interest rates, the Indian rupee has barely edged higher. Part of the reason is the Reserve Bank of India’s sledgehammer steps last week have been offset by other actions taken by the central bank and conflicting talk from government officials assuring lenders – the biggest players in the domestic bond markets – that these measures are temporary.

While New Delhi and Mumbai seem to be at last reading from the same page on communications policy this week, there seem to be two scenarios evolving. The first and more optimistic option is that bond investors give the thumbs up to the RBI’s steps and start shoveling money again into the markets after taking nearly $8 billion out of bonds since June.

Is Europe past the worst?

The PMI surveys take top billing today. China’s report showed a further slowdown in manufacturing activity with the index following to an 11-month low and well into contractionary territory.

Flash readings for the euro zone, Germany and France are due later. Whisper it, but it could just be that Europe’s economy is past the worst.

Beijing’s travails will obviously have knock-on effects for Europe, particularly Germany for which China is such a huge market. A Chinese “hard landing” – still not the central scenario – would be the last thing the world economy needs just as it shows signs of life.

Uncertain about the effects of uncertainty on jobs

Job number one at the Federal Reserve these days is to bring down high U.S. unemployment without sparking inflation. Job number two, it sometimes seems, is explaining just how unemployment got so high in the first place.

Two recent papers published by the San Francisco Fed offer what look like opposite takes on the topic.

“(S)tates in which businesses cited poor sales also registered disproportionately sharp drops in jobs and household spending,” wrote Princeton University professor Atif Mian and University of Chicago Booth School of Business professor Amir Sufi in a February Economic Letter.

Turkey and Hungary – tales of unorthodoxy

A big moment for Turkey. After desperate attempts to shore up the lira by burning through its reserves, the central bank must decide whether to raise interest rates instead.

Prime Minister Tayyip Erdogan, fearing an economic slowdown ahead of elections next year, will not want to see a sharp tightening of policy. Instead, he is blaming shadowy forces for his country’s plight.
But a rate rise might be what is required to prevent a full run on the currency and if that is the case, the earlier it is done the better to calm investor nerves. The central bank sent a strong signal last week that it was minded to push up at least some of its key rates regardless of the political pressure.

The odds are on it raising the overnight lending rate by something between 50 and 150 basis points even though testimony by Federal Reserve chairman Ben Bernanke last week has calmed markets about the speed and scale of U.S. withdrawal of stimulus and allowed emerging markets, including Turkey’s, to settle down somewhat.

Fed on guard over low U.S. savings rate

As Federal Reserve Chairman Ben Bernanke delivered what may have been his last testimony on monetary policy before Congress, most of the world’s attention was focused on what hints he might give about the timing of an eventual reduction in the pace of asset purchases.

Tucked in the actual semi-annual monetary policy report Bernanke delivered to lawmakers on Capitol Hill was a little-noticed reference to growing worries about the potential for an extended period of low savings, associated in part with long-stagnant wages, to thwart long-run economic progress.

Total U.S. net national saving – that is, the saving of U.S. households, businesses, and governments, net of depreciation charges – remains extremely low by historical standards.

U.S. housing outlook still promising despite rise in rates: Citigroup economist

U.S. housing sector fundamentals remain favorable despite the recent rise in interest rates and the sharp drop in housing starts in June, says Citigroup economist Peter D’Antonio.

Housing starts fell 9.9 percent to a ten-month low of 836,000 units in June.

But the decline was almost all in the volatile multi-family sector, D’Antonio notes. Single-family starts remained in a range just below 600,000, while multi-family fell 26 percent to 245,000.

Multi-family starts have been an important growth sector in housing in the past year, but month-to-month changes in multi-family starts – noted for their volatility – are meaningless. Multi-family housing starts rose 21 percent in March, fell 32 percent in April, rose 28 percent in May, then fell 26 percent in June.

Austerity fatigue – the financial world’s latest fad phrase

From the U.S., we’ve had lots of talk of tapering. In Europe, the latest fad phrase in the financial world is “austerity fatigue”.

It’s a strange euphemism, somehow disconnected from reality. More than 19 million euro zone citizens were out of work during May, roughly equivalent to the combined populations of Belgium and Austria. Youth unemployment is on the wrong side of 50 percent in Greece and Spain.

Fatigue here really means growing desperation, a public railing against rounds of budget cuts and rocketing unemployment in euro zone countries.

Curse of the front-runner a bad omen for Fed contender Yellen?

The buzz on who will replace Ben Bernanke as Federal Reserve chairman has grown this year and amplified recently with talk of Lawrence Summers as a real possibility. There is also lingering speculation over Timothy Geithner, another previous U.S. Treasury Secretary, and former Fed Vice Chair Roger Ferguson among others as possible successors. Bernanke has provided no hint he wants to stay for a third term.

But above the din the central bank’s current vice chair, Janet Yellen, has remained the front-runner. Her deep experience and implicit policy continuity has crowned her the heir apparent until proven otherwise. A Reuters poll of economists showed Yellen was seen as far and away the most likely candidate.

Yet this is a familiar plot that has played out in other Western countries over the past year – with a shock climactic twist. New Zealand, Britain and Canada have all pulled the rug out from under the presumed front-runner and named a surprise new head of their respective central banks. And perhaps most worryingly for Yellen, in each case the overlooked candidate was the bank’s No. 2 official.

Morgan Stanley cuts second quarter U.S. GDP forecast to 0.3 percent

The surprising weakness in June housing starts is probably only temporary, according to Morgan Stanley economist Ted Wieseman, but the softness in June nonetheless prompted him to cut Morgan Stanley’s Q2 GDP estimate to 0.3 percent from 0.4 percent.

After a 9.4 percent pullback from the February cycle high, single-family starts are now running far below the pace of new home sales. Unless sales roll over — which was certainly not the message from the surging homebuilders’ survey — supply of unsold new homes will fall to record lows in coming months, likely spurring a sharp renewed pickup in new home construction.

Incorporating the June softness, however, Morgan Stanley cuts its forecast for Q2 residential investment to +18.9 percent from +20.3 percent, which shaved 0.1 percentage point off the firm’s second quarter growth estimate. U.S. GDP growth averaged just 1.1 percent in the fourth and first quarters. Benchmark revisions will make the upcoming batch of growth figures harder to read than usual.