MacroScope

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.

History shows that it’s dangerous to read too much into very marginal shifts in central bank language. The likelihood is still that the Fed will begin slowing its pace of money creation later this year. European stocks are expected to climb on the Fed’s “dovish” language and German Bund futures have jumped about half a point. But it will only take a strong U.S. jobs report on Friday to shift market expectations again.

As a result, the pressure will be on Draghi to convince that just because the Fed is on the move doesn’t mean the ECB is too. His stab at “forward guidance” last month was partially successful in calming markets but this is an ongoing process, not least because the ECB’s steer – that it expects rates to stay at record lows for an extended period – is vaguer than the Fed’s, which has attached any move to an unemployment target.

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.

An Italian in Greece

Italian Prime Minister Enrico Letta will be in Athens for talks with Greek premier Antonis Samaras today with (whisper it) the prospect of the euro zone enjoying its first summer lull for years, in fact all the way up to German elections on Sept. 22.

No major decisions are likely before that point and who knows what will come afterwards, though continuity is a better bet than a radical shift.

 The latest poll at the weekend showed Chancellor Angela Merkel’s centre-right coalition lost its lead over the three main opposition parties. Merkel’s conservatives held steady at 40 percent but her junior coalition partner, the Free Democrats, lost one point to 5 percent while support for the main opposition parties remained steady.

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.

Just a typical euro zone day

Spain will sell up to four billion euros of six- and 12-month treasury bills, prior to a full bond auction on Thursday. Italy attracted only anaemic demand at auction last week and Madrid has already had to pay more to borrow since the Federal Reserve shook up the markets with its blueprint for an exit from QE.

However, yields are nothing like back to the danger levels of last year and both countries have frontloaded their funding this year. Economy Minister Luis de Guindos, who declared over the weekend that the Spanish economy will grow in the second half of the year, speaks later in the day.

The political backdrop is also shaky, and getting shakier by the day, although that doesn’t always infect market sentiment. Prime Minister Mariano Rajoy rejected calls to resign on Monday over a party financing scandal and said his reform programme would continue unaffected.

Portugal, ECB, Turkey — trials and tribulations

How to pull defeat from the jaws of victory in one easy lesson; look no further than Portugal.

After the resignation of both finance and foreign minister last week, Prime Minister Paolo Passos Coelho salvaged things by making the latter – Paulo Portas – his deputy and putting him in charge of dealing with the country’s EU/IMF/ECB lenders.

That could have created tensions and problems but we never got to find out because the president then rocked the political class to its foundations by throwing the deal out.

Turkish trouble

How much time does massive central bank currency intervention buy? About a day at a time in Turkey’s case. It spent $1.3 billion of its reserves yesterday to stop the lira going into freefall having thrown a record $2.25 billion at the market on Monday.

So far this year, the central bank has burned over $6 billion of its reserves which have now dropped below $40 billion. So that can’t go on for long, meaning an interest rate rise which a slowing economy really doesn’t need must be on the cards. The lira hit a record low versus the dollar on Monday.

Much of this is to do with the global emerging market sell-off sparked by the Federal Reserve’s exit plan from money-printing but Ankara has sown the seeds of crisis too, first with the very public standoff with protesters in its main cities who railed against what they see as Prime Minister Tayyip Erdogan’s increasingly authoritarian rule.

Banking on union

The European Commission will present its blueprint for a body to refloat or fold troubled banks, largely in the euro zone. As we’ve said ad nauseam, there is no chance of a great leap forward on this front ahead of Germany’s September elections. The question is whether Berlin’s line softens thereafter.

Brussels will suggest a cross-border body able to overrule national authorities. Germany is opposed and says that would require treaty change which could take many years. Beyond that the EU’s executive appears to have pulled its punches somewhat.

The new authority will have to wait years before it has a fund to pay for the costs of any bank closures since the plan foresees a levy on banks to build a war chest of up to 70 billion euros which is expected to take a decade, leaving the agency dependent on national schemes for years.

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.