MacroScope

EU ratings day: Portugal modest thumbs up, Dutch unscathed, Ireland awaited

Friday is European ratings day since EU rules took force requiring ratings agencies to say precisely when they will make sovereign pronouncements and to do so outside market hours.

S&P has already shifted its outlook on Portugal’s rating from creditwatch negative to negative. The rating remains at BB, one notch below investment grade. That sounds obscure but it’s actually something of a vote of confidence though probably short of what the market had been hoping for.

The ratings agency said it expects Lisbon to meet its budget deficit target this year based “partly on indications that the economy has been showing signs of stabilization since mid-2013” – another fillip as Lisbon tries to follow Dublin out of the bailout exit door this year.

Portuguese Prime Minister Pedro Passos Coelho will take part in his first parliamentary debate of 2014, after a roaringly successful bond issue last week, which has helped to bring debt yields in the secondary market to their lowest levels since 2010. He is likely to be asked whether the country will need a precautionary loan after the end of the bailout.

Fitch is also out with its verdict on the Netherlands, keeping its AAA rating with a negative outlook. The Dutch have already lost a triple A rating from S&P.
Fitch said public finances had deteriorated but remained within the “tolerance” of a top-notch rating, some relief to the Dutch government although the agency’s forecast of stagnation this year followed by anaemic 1 percent growth in 2015 is hardly cause to put out the bunting.

Turkish troubles

Ask investors about their minimum criteria when putting money into a country and rule of law comes pretty high. That’s one of the reasons why Turkey’s corruption scandal, and the reaction of the government in ousting hundreds of police officers, is so serious. The lira touched a record low on Thursday.

Today, parliament’s justice commission will debate a draft law reforming the High Council of Judges and Prosecutors, which makes judicial appointments. Critics of the bill say it will give the justice minister significant influence over appointments, describing it as anti-constitutional and undermining the separation of powers.

Prime Minister Tayyip Erdogan’s ruling party is slipping in the opinion polls although it remains comfortably ahead of its opponents. Erdogan finishes an Asian tour today with a visit to Malaysia.

No Let(ta) up for euro zone

Fresh from winning a vote of confidence in parliament, new Italian Prime Minister Enrico Letta heads to Berlin to meet Angela Merkel, pledging to shift the euro zone’s focus on austerity in favour of a drive to create jobs. He may be pushing at a partially open door. Even the German economy is struggling at the moment and the top brass in Brussels have declared either that debt-cutting has reached its limits and/or that now is the time to exercise flexibility. Letta will move on from Berlin to Brussels and Paris later in the week.

France, Spain and others will next month be given more time to meet their deficit targets and Berlin does not seem to object. Don’t expect Merkel to join the anti-austerity chorus but there are some hints of a shift even in Europe’s paymaster. Yesterday, it launched a bilateral plan with Spain to boost lending to smaller companies and said it could be rolled out elsewhere too. Details were very sketchy but something may be afoot. The European Central Bank, expected to cut interest rates on Thursday, is considering something similar although that is far from a done deal.

Forgotten about Cyprus, which only last month had financial markets in a lather and threatened to reignite the euro zone debt crisis? Today, Cypriot politicians vote on the terms of the bailout offered by the euro zone. It should pass but it could be tight. No single party has a majority in the 56-member parliament, and the government is counting on support from members of its three party centre-right coalition which have 30 seats in total.

A penny more for gas, $1 billion less for Walmart

Jessica Wohl and Chris Reese contributed to this post.

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For every penny rise in the price of gas at the pump, U.S. customers of Walmart take a collective $1 billion hit to their disposable income.

That astounding figure, from Wal-Mart Stores Inc’s U.S. division chief merchandising officer Duncan Mac Naughton, was largely overlooked when he disclosed it at a Barclays conference earlier this week. But the statistic is highly relevant to the macroeconomic outlook, and explains why Fed officials and economists start to worry every time the price of gasoline starts to rise.

With 140 million U.S. customers a week, Walmart –  the world’s biggest retailer – is the recipient of a good chunk of U.S. consumer spending, the biggest input to U.S. economic growth. Now that gas prices have stopped rising, the pressure is off. But the impact on Walmart customers may help explain a curious trend Credit Suisse economists have identified in U.S. jobless claims, which seem to go up every time gas prices rise and fall when pump prices slip.

from Global Investing:

Retail volte face confirms India as BRIC that disappoints

Jim O'Neill, the Goldman Sachs banker who coined the term BRICs to capture the fast-growing emerging-markets quartet of Brazil, Russia, India and China,  has fingered India as the BRIC that has disappointed the most over the past decade in terms of reforms, FDI and productivity. New Delhi's latest decision to put on hold a landmark reform of its retail sector will only confirm this view.

The government's backtracking on plans to allow foreign investment in supermarkets will not surprise those accustomed to New Delhi's record on key economic reforms. But it means India's weak performance on FDI receipts will continue and that's bad news for the worsening balance of payments deficit.  Speaking of the retail volte face, O'Neill said: "They shouldn’t raise people's hopes of FDI and then in a week, say, 'we’re only joking'".

Various Indian lobby groups that oppose the reforms contend that foreign giants such as Wal-Mart and Tesco will kill off the livelihoods of millions of small traders.

from Reuters Investigates:

China’s rebalancing act puts consumer to the fore

consumerWal-Mart, the world's largest retailer, now has 189 stories in China, according to its website. Soon it will have many more.  The U.S. chain has announced plans to open a series of "compact hypermarkets", using a bare-bones model developed in Latin America, the Financial Times said.

Wal-Mart stores are a bit different than the one's you might find in, say, Little Rock Arkansas. They sell live toads and turtles for one thing, The Economist reported. But they also sell the appliances, gadgets, and housewares that Wal-Mart stores merchandise everywhere.

And business is booming. Third-quarters sales in China soared 15.2 percent from a year earlier, according to the Financial Times story, compared with a paltry 1.4 percent inthe United States.

from Global Investing:

The Big Five: themes for the week ahead

Five things to think about this week:

APPETITE TO CHASE? 
- Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally's momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week -- as much from China as from the major developed economies -- will show how much appetite there is to keep chasing the rally higher. 

TAKING CONSUMERS' PULSE 
- A better picture of the health of the consumer will emerge this week as U.S. retailers' earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers' profit margins, are the only thing that will tempt them to shop -- both key issues for the macroeconomic and corporate outlook. 

CENTRAL BANK WATCH 
- After last week's Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE's expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 -- and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead.