MacroScope

Norway shifts tack

Norway’s centre-right swept to power last night, ousting a centre-left government that couldn’t capitalize on a solidly performing economy which escaped the world financial crisis largely unscathed (uncanny echoes of Australia’s weekend election here). The popular feeling seems to have been that a decade of strong growth was wasted and is now slowing.

Erna Solberg, Norway’s second woman premier, will have to govern with the anti-immigration, anti-tax Progress party which could be problematic. But they seem at one on the need for lower taxes at least.

Solberg also wants to revamp the $750 billion oil fund, the world’s biggest sovereign wealth fund. Changes could include breaking it up and requiring it to start investing in Norway, forbidden until now.

State-owned companies could be partly sold off but change won’t come quickly. The incoming governing parties don’t agree on precisely what they want and the budget is running huge surpluses so there’s no pressure there.

We also get Norwegian inflation data, which have generally surprised on the upside, limiting the central bank’s ability to loosen policy. In June, Norges Bank said it wouldn’t raise rates until late in 2014 and could cut before that.

Italy’s High Noon

Silvio Berlusconi’s political future – upon which both Italian and euro zone stability rest to varying degrees – is up for debate when a Senate committee meets on Monday to begin discussions that could end with formal procedures to expel him from the Senate. Talks could last for days.

Members of Berlusconi’s centre-right PDL have threatened to walk out of Prime Minister Enrico Letta’s coalition government if a final vote – due in the Senate in October or maybe November – bars him from political life, following the upholding of his conviction for tax fraud.

One of Berlusconi’s key allies says he has already prepared a video message that could announce a decision to bring down the coalition government.

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”.

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.

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.

Back from the beach

Back from a two-week break, so what have I missed?

All the big and ghastly news has come from the Middle East but there have been interesting developments in the European economic sphere.
It seems safe to say that Britain’s economic recovery is on track, and maybe more broadly rooted than in just consumer spending and a housing market recovery (bubble?).

Slightly more surprisingly, the euro zone is back on the growth track too with some unexpectedly strong performances from Portugal and France in particular in the second quarter. Latest consumer morale data have been strong and as a result European Central Bank policymakers have begun downplaying thoughts of a further interest rate cut. However, it’s unlikely that all these countries will grow as strongly in the third quarter. Tuesday’s reading of German sentiment via the Ifo index will be key this week.

Perhaps the biggest surprise was Germany’s Wolfgang Schaeuble admitting what was widely known but hitherto unacknowledged – that Greece will need more financial help. The real shock was not the news but the source; the assumption had been that no one would whisper a word until the German elections are out of the way in four weeks’ time. Angela Merkel has been notably more circumspect about Greece than her finance minister.

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.

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.

Spain on the way back … to stagnation

Spain heads the rest of the euro zone pack with second quarter GDP figures at a time when we’re seeing glimmers of hope, with surveys suggesting the currency area could resume growth in the third quarter.

The Bank of Spain has forecast a 0.1 percent drop in GDP from the previous three months. It is usually close to the truth which supports the government’s claim that the economy is close to emerging from recession.

Last week, the Spanish unemployment rate fell for the first time in two years, although at 26 percent of the workforce it remains alarmingly high, and PMI readings have begun to pick up.