MacroScope

Lew’s comes to Europe airing concerns

U.S. Treasury Secretary Jack Lew moves on to Berlin then Lisbon after spending yesterday in Paris. There, he urged Europe to do more to build up its bank backstops and capital, a fairly clear indication that Washington is underwhelmed by the German model of banking union which has prevailed.

Lew may also press for more German steps to boost domestic demand, after indirectly criticising Berlin for its policies during his last visit in April. If he does, he can expect a robust response from Schaeuble, at least in private.

Lew moves on to Portugal later in the day with Lisbon’s planned exit from its EU/IMF bailout presumably top of the agenda when he meets Prime Minister Pedro Passos Coelho.

German trade data, just out, showed exports rose for a fourth month running in November but imports dropped quite sharply, pushing the trade surplus higher. So the imbalances that Washington and others in the G20 have complained about are there for all to see. Having said that the shale gas boon seems to be narrowing the U.S. deficit.

November German industry orders figures follow later. Orders dropped by a dramatic 2.2 percent in October so anything short of the forecast 1.5 percent rebound will be disappointing. Euro zone unemployment and retail sales data for November are likely to offer little cheer, with the jobless rate holding at 12.1 percent.

Economic damage from the shutdown? Small to start, say forecasters

The U.S. government shutdown probably won’t hit the economy too hard, say economists. Some point to the fact the shutdown has come right at the start of the fourth quarter, meaning there’s time before the year’s out for the economy to recoup some of  lost output resulting from the downtime. But, the longer it goes on, the worse it will be.

And there is always that debt-ceiling tail risk – the worst-case scenario being that the U.S. Treasury will default on one or more of its obligations. A Reuters poll on Monday put that risk at less than 10 percent.

Here’s a selection of comments from economists on the impact of the shutdown:

Does less QE from the Fed necessarily mean a stronger dollar?

Based on the latest U.S. Treasury flows data, it may be time to ditch the textbook theory that says less monetary stimulus means a stronger currency – at least for now.

The problem may just be that the theory doesn’t fully account for the situation when your largest creditors – and they are very large – are trying to beat you to the market.

The Federal Reserve first hinted in May it would start reducing its bond purchase programme because the U.S. economy is recovering and so is the job market.

The wavering faith of capitalism’s high priests

Yet another guardian of market orthodoxy has uttered what was once an unspeakable heresy.

This week, the European Bank for Reconstruction and Development‘s (EBRD) acknowledged that its old approach of encouraging growth in client economies by reducing the role of the state and fostering private ownership was “simplistic”.

“The problem with this view is that markets cannot function properly unless there are well-run, effective public institutions in place,” the London-based development bank said in its annual transition report.

from Sebastian Tong:

Stop pushing and we’ll do it

The growing acrimony in the international debate over China's currency policy has led some to warn that Beijing could dig in its heels if pushed to hard to let its yuan rise. crybaby

But Barclays Capital says Beijing could let its currency strengthen as early as next month, notwithstanding its public resolve against Washington's threat to label it as a currency manipulator.

"They do have a 'If you stop pushing, we'll do it' attitude, which is kind of childish, really. But it will happen because they are the only country in the world, besides India, where there is a whiff of inflation," says Barclays' asset allocation head Tim Bond.

A grand bargain to solve global imbalances

Michael Pettis, a professor and China expert at the Carnegie Endowment for International Peace, has put together a thorough and informative look at all things U.S.-China trade. It’s well worth reading and watching the entire thing, but here’s a few highlights that jump out:

* We’re likely to see a significant increase in global trade tensions

* China will probably allow the renminbi currency to rise, but not by a lot

* There is a way to resolve those huge global imbalances but it will be painful and the chances of mustering the political will — in China, the United States and Europe — look slim.

A bit more on that last point: Pettis thinks that those three players need to “come to some kind of grand agreement.”