MacroScope

For markets, non-farms eclipse G20

The G20 will wrap up with entrenched positions on Syria and a little more entente over the emerging market turmoil prompted by the Federal Reserve’s impending move to slow the pace of its dollar creation programme.

The BRICS are plugging away with their plan for a $100 billion currency reserve pool to help calm forex volatility but officials admitted this is still a work in progress and won’t be deployable soon.

So, as China and Russia told India – and Washington said more broadly – it’s still incumbent upon countries to put their own houses in order.
The unsurprising rule of thumb is that countries with profound domestic problems have been the ones hit hardest since Ben Bernanke first put up his tapering plan in May. So, while the Fed may have caused the ripples, the fact the rupee is drowning is more due to India’s gaping current account deficit and general economic malaise.

The fact China and Russia have been making that point at the G20 is telling in terms of emerging market unity.

The final G20 communique is set to echo the finance ministers’ language in July, saying changes to monetary policy must be “carefully calibrated and clearly communicated”. There’s not a whole lot more that can be done given the Fed has ample domestic economic reasons to begin slowly rowing back.

History suggests rocketing British growth won’t last long

Britain’s economy is steaming ahead – by one measure faster than any other large developed or emerging economy – but history suggests it will struggle to sustain the rapid growth indicated in business and confidence surveys.

Data this week showed British businesses were at the forefront of Europe’s nascent economic recovery, outpacing major euro zone peers that are still grappling for momentum.

British services companies enjoyed their fastest growth since December 2006 in August, according to purchasing managers’ surveys, while housing market activity is gaining, and consumer sentiment is at its highest in almost four years.

Italy housing tax showdown

 

Italy’s fraying coalition cabinet meets to discuss what to do with a property tax imposed by previous premier Mario Monti.

Silvio Berlusconi’s centre-right group wants to scrap it – though that would create a 4 billion euro annual financial gap to be filled elsewhere – while the centre-left PD of Prime Minister Enrico Letta wants to keep it for the rich, which would cost only 2 billion euros. The argument has already stalled decisions on more wide-ranging economic reforms. A percentage point rise in the main rate of value-added tax has already been pushed back to October from July and will need to be discussed again too.

The big question is whether the government is effectively paralysed until a vote next month on whether to bar Berlusconi from parliament following the upholding of his tax fraud conviction. Members of his centre-right PDL are threatening to bring down the government and trigger early elections if he is expelled. If he is not barred, swathes of Letta’s centre-left PD would react with horror.

Recalculating: Central bank roadmaps leave markets lost

Central banks in Europe have followed in the Federal Reserve’s footsteps by adopting “forward guidance” in a break with traditionBut, as in the Fed’s case, the increased transparency seems to have only made investors more confused.

The latest instance came as something of an embarrassment for Mark Carney, the Bank of England’s new superstar chief from Canada and a former Goldman Sachs banker. The BoE shifted away from past practice saying it planned to keep interest rates at a record low until unemployment falls to 7 percent or below, which it said could take three years.

Yet the forward guidance announcement went down with a whimper. Indeed, investors brought forward expectations for when rates would rise – the opposite of what the central bank was hoping for – although the move faded later in the day.

Forward!

The Bank of England will give the government its blueprint for “forward guidance” when it publishes its quarterly inflation report, a big moment in British policymaking.

Canadian Mark Carney, in his second month at the helm, was heralded in advance as the man to kick start a languishing economy but with green shoots sprouting all over the place that may not be needed. Nonetheless, if companies and households can be convinced interest rates will stay at record lows for a prolonged period, that could boost investment and spending and help solidify a recovery that now looks to be in train.

After the U.S. Federal Reserve indicated that it may soon start to phase out its bond purchases – two of its policymakers again pointed to September yesterday – the Bank of England made a first stab at forward guidance last month, saying a rise in UK market rates was misguided. Now it will be more precise.

Event risk

If you’re hankering after “event risk”, look no further. Europe can offer top central bank meetings, front line economic data, a debt auction and more political risk than you can shake a stick at today.

This could be almost a perfect storm of a day after the Federal Reserve said its bond-buying would continue unabated for now and gave no new firm steer as to when it might begin rowing back, although its choice of adjective to describe the pace of growth – modest rather than the previous moderate – could be a hint that it is in less hurry to taper.

Now, it’s the European Central Bank’s turn. Given its forecast for recovery in the second half of the year has some evidence behind it, an interest rate cut is unlikely. Instead, for the second month running, Mario Draghi may have to focus primarily on the backwash from the Fed.

Bank of England on the money with its 1982 vision of a “less cash” society

The Bank of England has a fairly dubious record of forecasting the UK economy, but 30 years ago it was right about one thing – how our use of cash would change.

A look through the Bank’s publications archive, uploaded to its website on Tuesday and going back to 1947, reveals all sorts of historical curios – not least its handling of Nazi gold in 1939

Another is a 1982 report on why demand for cash was growing far more slowly than expected, which at the time was hard to reconcile with a widespread belief that the black economy was on the rise.

Central bank guides

The Bank of England will publish the minutes of Mark Carney’s first policy meeting earlier this month which will pored over for signs of how the debate about forward guidance – it’s all the rage in the central banking world now – went, and whether that may herald more money printing or act as a proxy for looser policy.

Carney’s colleague, Paul Fisher, indulged in his own form of guidance yesterday, telling a parliamentary committee that discussions within the Bank were focused on how to give a steer about future policy moves and whether to inject more stimulus, not whether it should start to be withdrawn as the Federal Reserve has signalled it may do before the year-end.

Fisher is one of the three of nine members of the Monetary Policy Committee who has been voting to print more money in recent months, but it was an interesting comment nonetheless. Unemployment data today will give the latest guide to the state of recovery while the independent Office for Budget Responsibility will publish its fiscal sustainability report.

Forward guidance; will it work?

After the European Central Bank broke with tradition and gave forward guidance that interest rates will not rise for an “extended period” and could even fall, some of its members – including French policymakers Benoit Coeure and Christian Noyer, and Bundesbank chief Jens Weidmann – head to an annual gathering in the south of France.

Mark Carney’s Bank of England adopted the same tactic, showing just how alarmed the big central banks are at the potential turmoil unleashed by the Federal Reserve’s money-printing exit plan.
The big question is whether forward guidance can possibly allow them to escape the backwash from the Fed’s “tapering” when it comes or, whether in the euro zone’s case, sovereign borrowing costs will rise further, potentially pushing a number of countries back into danger territory.

An early test will come from today’s key U.S. jobs report. If it comes in strong, European bond yields are likely to rise across the curve.

A day to reckon with

This could be a perfect storm of a day for the euro zone.

Portugal’s prime minister will attempt to shore up his government after the resignation of his finance and foreign ministers in successive days. The latter is threatening to pull his party out of the coalition but has decided to talk to the premier, Pedro Passos Coelho, to try and keep the show on the road.

If the government falls and snap elections are called, the country’s bailout programme really will be thrown up into the air. Lisbon plans to get out of it and back to financing itself on the markets next year. Its EU and IMF lenders are due back in less than two weeks and have already said the country’s debt position is extremely fragile.

Given the root of this is profound austerity fatigue in a country still deep in recession a further bailout is increasingly likely. Portuguese 10-year bond yields shooting above eight percent only add to the pressure; the country could not afford to borrow at anything like those levels. President Anibal Cavaco Silva’s will continue talks with the political parties today.