MacroScope

What is France to do?

It’s euro zone third quarter GDP day and Germany and France are already out of the traps with the latter’s economy contracting by 0.1 percent, snuffing out a 0.5 percent rebound in the second quarter. Growth of 0.1 percent was forecast, not just by bank economists but by the Bank of France too.

Germany failed to match its strong 0.7 percent growth in the second quarter, but expanding by 0.3 percent – in line with forecasts – it is clearly in much better shape.

The Bank of France has estimated stronger growth of 0.4 percent in the final three months of the year but the euro zone’s second largest economy is a growing cause for concern. An OECD report on French competitiveness, released overnight, said it is falling behind southern European countries that have bitten the reform bullet.

The OECD warned that markets can turn quickly on vulnerable countries although with its deep and liquid bond market, France is somewhat protected in that respect. France’s labour and pension reforms are widely viewed as being timid and with Hollande’s poll ratings at record lows there is not much chance of a great leap forward.

Spain has been much more aggressive and is seeing the benefits in terms of rising exports (and, admittedly, sky-high unemployment). So too has Portugal.

ECB rate cut takes markets by surprise – time to crack Draghi’s code


After today’s surprise ECB move it is safe to forget the code words former ECB President Jean-Claude Trichet never grew tired of using – monitoring closely, monitoring very closely, strong vigilance, rate hike. (No real code language ever emerged for rate cuts, probably because there were only a few and that was towards the end of Trichet’s term.)

His successor, Mario Draghi, has a different style, one he showcased already at his very first policy meeting, but no one believed to be the norm: He is pro-active and cuts without warning. Or at least that’s what it seems.

Today’s quarter-percentage point cut took markets and economists by surprise.

The limits of Federal Reserve forward guidance on interest rates

The ‘taper tantrum’ of May and June, as the mid-year spike in interest rates became known, appears to have humbled Federal Reserve officials into having a second look at their convictions about the power of forward guidance on interest rate policy.

Take James Bullard, president of the St. Louis Fed. He acknowledged on Friday that the Fed’s view of the separation between rates guidance and asset purchases had not been fully accepted by financial markets. “This presents challenges for the Committee,” he noted.

A decision to modestly reduce the pace of asset purchases can still leave a very accommodative policy in place to the extent forward guidance remains intact.

Congress “smashed the instrument panel” of U.S. economic data: Fed’s Fisher

Richard Fisher, president of the Dallas Federal Reserve and one of the U.S. central bank’s arch inflation hawks, took us by surprise this week – he told Reuters that, given all the uncertainty generated by the government shutdown, it would not be prudent for the Fed to reduce its bond-buying stimulus this month.

“It is just too tender a moment,” he said. That was on Tuesday, before a last-minute deal averted a debt default but set up additional uncertainty by pushing the statutory spending cap into February.

Fisher said he wishes the Fed had begun the so-called ‘tapering’ process in September as markets has expected. But while he did not rule out a pullback from the current $85 billion monthly pace of asset purchases in December, he did acknowledge the next couple months of data could be “noisy” as economists try to weed out temporary shutdown effects from the broader trend.

Can they kick it? Yes they can

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During the recent round of financial crises, policymakers have done a whole lot of “kicking the can down the road”.

The latest is taking place in the United States where a fiscal stalemate between Republicans and Democrats has forced the first partial government shutdown in 17 years.  It has also raised concerns about a U.S. debt default, should the government not meet a deadline this week of raising the debt ceiling. That has kept short-term U.S. interest rates and the cost of insuring U.S. debt against default relatively elevated.

While markets remain convinced there will be a last-minute deal – because the consequences are far to dire for there not to be – their performance has ebbed and flowed with the mixed messages from Washington.

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.

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:

A market-dependent Fed?

It’s hard to shake the feeling that the Federal Reserve is about to begin pulling back on stimulus not just on the back of better economic data, but also because financial markets have already priced it in. The band-aid ripping debate over an eventual tapering of bond purchases that started in May was so painful, Fed officials simply don’t want to go through it again.

If anything, recent data have been at best mixed, at worst worrisome. In particular, August job growth was disappointing and labor force participation declined further.At the same time, inflation remains well below the central bank’s objective.

Argues Dean Croushore, a former regional Fed bank economist and professor at the University of Richmond:

Too early to call revival in Latin America manufacturing

It may be too early to herald a revival of Latin America’s manufacturing following a recent currency decline, according to a report by London-based research firm Capital Economics.

Increased competitiveness of local factories has been seen as a good side effect of the currency shock triggered by prospects of reduced economic stimulus in the United States. However, the data compiled by Capital Economics suggests there is still a long way to go before investors see any fireworks.

David Rees, emerging markets economist at Capital Economics, wrote in his report:

Trust me, I’m with Google

Hal Varian, Google’s chief economist, is unsurprisingly an advocate of data extraction and analysis on a mass scale – you’d almost have to be, as data-cruncher-in-chief of a company whose search engine was tapped a billion times just since this morning.

At the annual meeting of the National Association for Business Economics in San Francisco, Varian talked at length about how people can use software to make life better, describing one Google application that he said can retrieve information from your private calendar, check the traffic on the route to your next appointment, and notify you that you’d better leave shortly or risk being late. “I have to say, for some people, this completely freaks them out,” he quipped, but later added that for most kinds of information, the benefits of sharing information with your computer outweigh the costs.

Still, some people are uncomfortable with the extent to which their privacy is at risk in an online world, particularly after new revelations about the U.S. National Security Agency’s ability to keep electronic tabs on Internet users. Asked about legislative responses to the leaks from former NSA contractor Edward Snowden, Varian had this to say: