MacroScope

A jobless guide to interest rates

The Bank of England’s decision to peg any move in interest rates to the downward progress of unemployment has invested the monthly figures, due today, with huge importance.

In a nutshell, markets don’t believe the jobless rate will take the best part of three years to fall from 7.7 percent to below 7.0, the point at which the Bank said it could consider raising rates from a record low 0.5 percent. For what it’s worth, the consensus forecast is for the rate to be unbudged at 7.7 in August.

There are some reasons to think the Bank might be right – an ageing population working longer, slack within companies (such as part-time working) which can be ramped back up again before any new hiring takes place – but if markets continue to price in a rate rise early than the Bank expects, then it has de facto policy tightening to deal with.

Funny thing confidence. No one could buy a jot of it for three years yet in a month offering the threat of a U.S. default – with Fitch having now put Washington’s credit rating on negative watch — and in which the Italian government almost collapsed, German investor sentiment shot up again.

Auto industry association ACEA is just out saying an extra working day and a surge in UK sales boosted Europe’s new car market in September, providing fresh evidence that demand is slowly bottoming out.

A tale of two budgets

 

It’s deadline day for euro zone member states to submit their 2014 budget plans to the European Commission for inspection and we’re waiting on Italy and Ireland.

Having survived Silvio Berlusconi’s attempt to pull the government down, Prime Minister Enrico Letta’s coalition has to overcome differences on tax and spending policy.
The aim is to agree a 2014 budget that reduces labour taxes by some 5 billion euros but also undercuts the EU’s 3 percent of GDP deficit limit, so spending cuts will be required.

Rome has a chequered track record in that regard. The cabinet will meet at 1500 GMT to try and agree a comprehensive package. A Treasury source said the scale of tax cuts would be dictated by how much the various government ministries are prepared to forego.

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.

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.

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.

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.

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.