MacroScope

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.

So it shouldn’t be a surprise that Italy will offer a seven-year bond while the Spanish Treasury mandated banks for a 31-year bond, the first of such a long maturity since 2009. Some of Spain’s biggest companies – Santander, Gas Natural and Telefonica – have also forayed into the debt market.

In a sign of how far Madrid has come since a bailout was seen as all but inevitable a year ago, the government has also toyed with the idea of issuing a 50-year bond at some point.

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.

Italian market test

Italy will auction three different bonds, aiming to raise 7.5 billion euros against a volatile domestic backdrop.

A sale of one-year bills on Wednesday saw yields rise, this after the Treasury asked parliament to raise the ceiling on this year’s net debt issuance to 98 billion euros from 80 billion, given the struggle to rein in public finances and a government commitment to pay outstanding bills to firms, which at least could give the economy a boost.

Parliamentarians have a bigger fish to fry in the form of Silvio Berlusconi. A cross-party Senate committee that must decide on whether to bar him from political life drew back from the brink on Tuesday but has caused growing tension between the coalition parties with some of Berlusconi’s allies threatening to pull the shaky government down.

UK unemployment — the monthly monetary policy guide

Of the week’s economic data, today’s UK unemployment stands out since the Bank of England has pegged any move up in interest rates to a fall in the unemployment rate from 7.8 percent to below 7.0. The rate is forecast to have held at 7.8 percent in July.

Bank of England Governor Mark Carney has struggled to convince markets of his contention that interest rates are unlikely to rise for three years because the jobless rate will fall only very slowly. Interest rate futures – short sterling – spiked higher after last week’s policy meeting which offered no change of direction and no statement.

There are some key imponderables:
1. To what extent UK firms have kept workers on but worked them less (its certainly true that the jobless rate rose less than expected during Britain’s recession), leaving plenty of scope to ramp up as growth returns without hiring large numbers of new staff.
2. The economy is still three percent smaller than it was in 2008 but no one is quite sure how much activity has been permanently lost during the financial crisis so the size of the output gap is uncertain and therefore so is the level of output at which price pressures start to build.
3. Most importantly, with the Federal Reserve poised to act, can a country like Britain possibly divorce itself from the world’s economic superpower as it sets the global terms of monetary policy?

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.

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.

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.

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.

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.