MacroScope

As election passes, German election keeps on chugging

Germany’s Ifo sentiment index is the big data release of the day and is forecast to continue its upward trajectory after the country’s PMI survey on Monday showed the private sector growing at its fastest rate since January.

Surveys have been strong through the last quarter, putting a question mark over the downbeat European Central Bank and German government forecasts for the second half of the year. The currency bloc as a whole looks set to pretty much replicate its 0.3 percent growth in the second quarter, nothing spectacular but a sign that recession is probably a thing of the past. The German economy rebounded strongly in the second quarter, growing by 0.7 percent. It might not quite match that in Q3 but it may not be far off.

After the Federal Reserve took its finger off the trigger, emerging markets have enjoyed some welcome respite. Hungary’s central bank meets today having cut interest rates by just 20 basis points in August, ending a run of successive quarter-point cuts stretching back into last year.

With no short-term pressure on the forint, central bankers have been talking about a further 10-20 bps cut and they have already announced that they will pump up to 2 trillion forints into the economy to provide cheap loans to businesses.

On the other side of the ledger, the government of Viktor Orban is intent on helping the many Hungarians with foreign currency mortgages with a relief scheme that will impose big losses on the banks. Deputy Economy Minister Gabor Orban, speaking at the Reuters Russia/CEE summit, could have some interesting things to say. We also interview the finance ministers of Russia, Bulgaria and Serbia.

Angie ascendant

The ecstasy and the agony.

Angela Merkel scored a resounding election victory but by apparently falling just short of an overall majority, while her FDP coalition colleagues failed to get the 5 percent share of the vote needed for any parliamentary representation, she is probably going to have to turn to the centre-left SPD to form a government.

An SPD/Greens/left coalition is not impossible but having secured 42 percent of the vote, the tune is Merkel’s to call.

A grand CDU/SPD coalition is favoured by the German public, according to the polls, and could lead to some policy shifts, and certainly a lot of haggling over key positions in government (will Wolfgang Schaeuble remain as finance minister?) but is unlikely to lead to any seismic shifts, particularly in euro zone policy. The anti-euro Alternative for Germany (AfD) fell just short of 5 percent but having come from nowhere in just seven months, it has put down a marker.

Back from the brink

Pulling back from the brink. The Federal Reserve certainly has and so has Silvio Berlusconi (so far).

Not much to say about the Fed directly, except that it’s surely still only a matter of time, but it certainly takes the pressure off the central banks meeting in our region today. German Bund futures have leapt about 1-1/2 points and Italian bond futures are up more than a full point. We can expect emerging market assets to climb sharply too – the Turkish lira is up three percent, for example, giving its embattled central bank some breathing space.

Further out though, what this has done is create more uncertainty rather than giving investors a firm direction of travel. Presumably, Bernanke and co. are somewhat alarmed about the durability of U.S. economic recovery, which should give everyone pause for thought.

from Sakari Suoninen:

Beer washes out German inflation angst

photo

Germans, many say, have inflation angst in their DNA. But there is one exception to that. Beer.

Although prices at Oktoberfest have been inflation-beating for years, consumption keeps rising. Average price of the 1-liter (35 oz) stein of beer will be 9.66 euros ($ 12.85), up 3.6 percent from last year's festivities, compared with German overall annual inflation of 1.5 percent.

Since 1985, the Wiesn Visitor Price Index has risen more than twice as fast as the country's overall inflation rate, Unicredit calculations show. But this has failed to stem the tide of more beer flowing down visitors' throats, with millions and millions of litres to be consumed again this year.

Banking union shift

For most of the year, the biggest question for the euro zone was whether the pace of reform would pick up after German elections which are now just six days away. Thanks to a Reuters exclusive over the weekend it appears the answer could be yes, at least incrementally.

Senior EU officials told us that Germany is working on a plan that would allow the completion of a euro zone banking union without changing existing EU law. Until now, Berlin has insisted the EU would have to amend its Treaty to move power to close or fix struggling banks from a national to a European level – a process which could take years.

In exchange, a cross-border resolution agency would only rule over the fate of 130 euro zone banking groups that will be directly supervised by the European Central Bank from the second half of 2014. That would leave Germany’s politically sensitive savings banks under Berlin’s control.

Euro chat resumes

After the summer lull, euro zone and EU finance ministers meet in Lithuania. The “informal Ecofin” can often be quite a big deal but with German elections only nine days away, it’s hard to see that being the case this time.

During the election campaign German Finance Minister Wolfgang Schaeuble let slip that Greece would need more outside help which would not include a haircut on Greek bonds held by euro zone governments and the ECB.

Since then, European Central Bank policymaker Luc Coene has said Athens might need two bouts of further assistance and Estonia’s prime minister told us yesterday the popular bailout fatigue he flagged as a danger last year had now faded and he was open to aiding Greece with a third bailout and helping other troubled euro zone nations too.

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.

An Italian bullet dodged, but more in the chamber

Italy will sell up to six billion euros of five- and 10-year bonds at a somewhat inauspicious time.

Yields rose modestly at shorter-term debt sales on Tuesday and Wednesday with the government wobbling, and the prospect of the Federal Reserve reducing U.S. stimulus has put pressure on peripheral euro zone bond yields more broadly.

However, Italy’s restive coalition managed last night to reach a deal on a deeply unpopular property tax, showing it can still function despite fractures over Silvio Berlusconi’s future. On the secondary market yesterday, yields dipped in anticipation of a deal which will abolish the tax from the beginning of 2014 to be replaced by a “service tax”.

Euro zone rate cut prospects evaporate

The euro zone is growing again and while its weaker constituents face plenty of tough times yet, it seems less and less likely that the European Central Bank will cut interest rates from their record low 0.5 percent. That illustrates the problems of the new fad of forward guidance.

The ECB deliberately stayed vaguer than most – a product of ripping up its custom of “never precommitting” – saying that rates would stay at record lows or even go lower over an extended period.
Its monthly policy meeting falls next week and in a parallel transparent world Mario Draghi could consign the “or lower” part of the guidance to history after just two months. Don’t bet on that happening but it shows how quickly things can move.

If anyone in Europe, Britain or elsewhere is hoping for a cast iron guarantee that rates won’t rise for two, three or more years, forget it.
Exhibit A today will be Germany’s Ifo sentiment index which has been coming in strong in recent months and is not expected to buck that trend.
It must be only a matter of time before the government and Bundesbank upwardly adjust their forecasts for a significant slowdown in the second half of the year, following 0.7 percent growth in the second quarter.

Silvio’s trials

Italy’s Supreme Court last night upheld Silvio Berlusconi’s conviction for tax fraud and a four-year jail term, to the fury of the man who has dominated Italian politics for 20 years and throwing a fragile coalition government into peril.

The markets have been sanguine about Italy, maybe with good reason, since its reform and debt-cutting programme is well in train and no one seems to want fresh elections. But that could change for a country that has always been viewed as “too big to bail” by the euro zone.

Italian bond futures have even risen a little, taking a wait-and-see view. There is of course the little matter of the U.S. non-farm payrolls report looming later, with markets still fixated on the chances of the Federal Reserve slowing its bond-buying programme this year.