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Erik Nielsen On The World Cup, The European Round Up, And On Wednesday's Huge Day For The ECB And Greece
- Belgium
- British Bankers' Association
- CPI
- European Central Bank
- Fail
- France
- Germany
- Greece
- Gross Domestic Product
- International Monetary Fund
- Italy
- LIBOR
- Monetary Policy
- Money Supply
- Nielsen
- Norges Bank
- Norway
- Poland
- Private Equity
- recovery
- Sovereign Debt
- Sovereigns
- Switzerland
- Unemployment
- United Kingdom
We have already had our say about Denmark's World Cup performance. It was not lost on Erik Nielsen. It has not had as much of a dire impact on his outlook, as his European round up is summarized: "that’s the way Europe looks from my unbelievably green garden on this gorgeous afternoon. I shall now pour myself some sort of chilled and lovely summer drink and turn to my favourite book." Something tells us this is not Hayek. More importantly Erik points out why Wednesday will be a very important "micro event" day for Europe: the ECB's 12 month LTRO, whose impact on Libor and Euribor we discussed previously, matures on the 1st, and also on Wednesday "Greece formally falls out of the indices because of their downgrade. How much selling will that cause? I have no clue, but I would fail to understand why investors would have waited till the last day to get rid of their Greek bonds when they have known about the issue since June 15." Yet Erik points out something curious: "the Greek governments intends to roll over 3, 6 and 12 month treasury bills maturing in July; a total of about €3.5bn. Auctions are expected on Tuesday 13th and on Tuesday 20th July." And he wonders:"Why are they doing it? Could it be that they are responding to demand from banks and other investors who have started to appreciate that a debt restructuring the next 12 months is very unlikely and therefore looking for high-yielding assets? If so, this would be a mis-guided move, in my opinion, and – frankly – I hope the IMF and EU would tell them to back off." Looks like yet another shoe in the European collapse may be due to drop this week.
Happy Sunday,
Needless to say, I lost a good deal of my interest in the World Cup a few days ago, so I’ll leave it like this and head straight to the usual European matters:
- I just returned from a few days in Croatia – beautiful and in pretty good shape with a booming tourism sector.
- Policy changes generally in the right direction continue throughout Europe.
- The macro data got a bit softer last week (but nothing to worry about), while markets went more significantly into risk aversion mode.
- The European Commission will publish on Wednesday its concrete proposals for how to monitor and coordinate economic policies going forward; the missing link will be “enforcement”, and here I’ll argue that they’ll need to get the ECB involved.
- Germany will elect its next president on Wednesday; surely important for domestic German politics (and policies) – less so for Germany’s role in Europe.
- We are heading into the usual survey week in Europe with sentiment indicators, PMIs or the equivalent in the Euro-zone, the UK, Switzerland and Norway. Apart from Norway, we expect them all to ease a bit, but – importantly – we see no reason to think that such easing are anything more than a normal stabilisation of presently above-trend indicators.
- Finally, Sweden’s Riksbank will decide on rates this week, and – on balance - we think they’ll hike by 25bp.
-1 I am just back from one of my hardship assignments, namely the Croatian National Bank’s annual conference in Dubrovnik where we discussed, among other things, the future of the Euro zone; a topic naturally close to their heart. I love Croatia; it’s generally well managed and ticking along very nicely there on Europe’s possibly most beautiful coastal line. EU membership should be no more than two years away now (and less if silly politics got out of the way), and Euro-zone membership is almost there already by public demand (all you Euro-sceptics really ought to visit Croatia!) Euros are accepted everywhere from shops to restaurants to museums at basically no premium on the FX-rate (and you’ll get your change back in Euros). Tourism is up some 27% yoy, partly – they think – due to people redirecting their vacations away from Greece (and yes, the central bank is intervening to avoid too much appreciation), while banks are seeing increasing inflows into their Euro deposits from foreigners seeking better returns. So yes, life is good … as the taxi driver who took me to the airport yesterday said: “our biggest fear is that we end up like Greece, so we have to work extra hard while keeping our prices down; it’s very important we don’t loose our tourists.” Music to my ears – and not only as a visitor, but also as an economist who fundamentally believe in Europe’s ability to adjust! (Yes, I gave him a big fat tip and told him that I liked his attitude.)
-2 This change in attitude is now rolling out throughout Europe. Last week Italian unions voted overwhelmingly in support of Fiat’s management request for further shifts and more flexibility at their Naples’ factory – in return for a €700m investment making it possible to move the production of the new Panda from Poland to Naples. Meanwhile, new data from the UK’s Office for National Statistics showed that an increasing number of both men and women are staying actively involved in the labour market well after reaching their retirement age; similar data from Continental Europe show the same trend, clearly making it easier to raise the retirement age throughout Europe. In France, there was a massive one-day strike in protest against the government’s fundamentally good pension plan, but – I am tempted to say - that’s just the way it is in France; certainly president Sarkozy didn’t seem too bothered. He took time out on the very same day to meet with Tierry Henri to hear what in the world had gone wrong in South Africa. (Having just watched the Germany-England game, I think we should start a campaign to get overpaid but underperforming European footballers to donate a chunk of their pay to South African charities!) Meanwhile the French government announced further tax hikes for next year with details for a public sector spending freeze likely to be announced this coming week. (I think we could start – throughout Europe - by eliminating the preferential tax treatments of diplomats.) Also, the new UK government announced the toughest budget in my memory with almost nobody outside the “commentriat” noticing, let alone worrying. Finally, negotiators in Brussels made good progress on financial supervision for banks, insurance and securities markets, while the issues relating to hedge funds and private equity will be pushed to after the summer break. (I am not here commenting on the details of whats been agreed, but I think one should welcome the prospect of getting certainty on what the regime will look like in the future.)
-3 While I was being seduced by Dubrovnik, the battle that I have been monitoring for months (namely between the recovery in the real economy and dysfunctional markets), suffered a minor set-back, but nothing serious, as far as I can judge. The important flash PMIs for the Euro-zone registered a slight sequential slowdown, but the level is still pointing to robust above trend growth, while the German Ifo fully underlined this robustness. Eurocoin also continues to indicate above trend growth. That said, the levels so far in Q2 of both the surveys and the hard data, combined with the fact that we had more inventory build-up in Q1 than we had expected (probably leaving less for Q2), makes me a bit nervous about our aggressive +0.9%qoq (non-annualised) Q2 GDP forecast; once we get the June IP numbers we’ll take a fresh look. I am sure we’ll maintain a robust outlook above consensus, but maybe by a bit less than what we have now. Meanwhile, equities were down and sovereign spreads wider on the week as part of a general de-risking, probably associated with renewed concern about global growth. The three small European peripherals supported by the ECB were also wider, probably because the ECB was further scaling back its support from the already low €4bn the week before last (with Greece also widening on changes in the indices post down grade.)
Turning to this coming week:
-4 For good order: On Thursday Belgium’s caretaker government takes over the EU presidency from Spain. You probably wont notice, but now you know.
-5 The European Commission will publish on Wednesday its concrete proposals on how to better coordinate economic policies in Europe going forward. As far as I understand, it’s still unclear whether they’ll limit their proposals to the Euro-zone, or whether they’ll insist on applying them to EU-27. Either way, we’ll surely get a very explicit scoreboard which will include fiscal policy as well as a long set of private sector indicators from productivity to unit labour costs, to broader competitiveness measures, and – of course – the current account. This will be a hugely important step in recognising how to measure future imbalances before they develop too far, but maybe more importantly it’ll be interesting to see if there’ll be proposals also on how to deal with problems as they arise. This touches on the tricky issue of “enforcement.” As I have discussed on earlier occasions, I worry that policymakers will brush this issue aside with the excuse that moral suasion and peer pressure – and maybe “name and shame” – will be sufficient. My view is that they’ll have to go further, but that they do not need to move towards fiscal federalism, as suggested by many. Instead, the focus should shift to ECB policies. Specifically, as soon as some sort of normality has been restored, the ECB should incorporate a quantitative approach, based on the Commission’s scoreboard, to apply varying haircuts on sovereign debt – and make it explicit, automatic and public. In other words, if a Euro-zone member state starts to under-perform on any of the indicators agreed with the Commission and the Council, then haircuts will increase, raising the cost of issuing and sending a powerful signal to the market to watch out. I’ll write much more on this shortly.
-6 Also on Wednesday, the next German president will be elected by a specially constituted 1244 member strong federal assembly. It looks as if Merkel’s candidate, Christian Wulff, will win since she and her coalition partners hold a comfortable majority among the members. However, opinion polls suggest a recent dramatic decline in Merkel’s and the coalition’s popularity, so there could be a surprise in the making. Wulff’s opponent, Joachim Gauck is an independent – supported by the Social Democrats and the Green - with a fine record as the former head of the Commission investigating the former East German secret police. Some political commentators suggest that if Gauck were to beat Wulff on Wednesday then Merkel and her coalition would resign. Importantly, however, this is an internal German drama with limited impact on Germany’s role in Europe. As we have long argued, historically, the SPD and the Green have a more pro-European agenda than the centre-right coalition. (At least Merkel does not have to take time out of her busy agenda to deal with an under-performing national football team!)
-7 In the Euro-zone, private-sector indicators of sentiment will continue to come in this coming week. We expect to see small declines in the EC business and consumer surveys for June (Tuesday, EMEA-MAP 4) and a small increase, to 96.5 after 96.2, in the Italian business survey (Wednesday, EMEA-MAP 4). German unemployment numbers for June will also emerge on Wednesday (EMEA-MAP 2): we expect another sizeable decline in the number of unemployed (–25k) as the recovery gains traction and the willingness of companies to hire continues to increase. The Euro-zone unemployment rate for May is due on Thursday (EMEA-MAP 5): we expect it stable at 10.1%. On the inflation front, German CPI inflation for June is due tomorrow, Monday; we expect it at 0.7%, after 1.2% , driven predominantly by base effects - preliminary data released on Friday suggested upside risks to this forecast. Spain will publish its CPI on Tuesday (we see it down to 1.2% after 1.8%) while Italy will release it on Wednesday (+1.4% after +1.6%). Also on Wednesday, Eurostat will publish the flash CPI for the Euro-zone: we see it down to 1.3% after 1.6%. Watch also the ECB’s May report on money supply and, especially, bank lending to households and corporate; it’s out tomorrow. There are also a few ECB speeches, but I rather doubt that we’ll learn anything important from any of them – but we’ll listen: Weber speaks tomorrow, Monday, Stark and González-Páramo on Friday.
-8 In the UK we’ll get the next round of national accounts estimates for 2010Q1 on Wednesday. This will include the first pass at the income accounts (including savings rates and financial balances). Note too that it will be consistent with the 2010 Blue Book, the full set of national accounts released every summer, and may therefore include revisions to estimated growth in 2009 and earlier. If anything, we’d expect an upward revision to the -0.2%yoy figure for annual GDP growth in 2010Q1; the consensus expectation is for no change. On other data, we’ll get the manufacturing and construction PMIs, on Thursday and Friday respectively (the services PMI is released the following Monday) and, on Tuesday, numbers for mortgage approvals and M4 growth. The consensus expectation is for a small decline in the manufacturing PMI (57.6 from 58.0) and a small rise in mortgage approvals (51.0K from 49.9K), close to the 1.6K increase we saw in approvals by banks alone (the BBA data were released last week).
-9 Switzerland also publishes the key June surveys this coming week: the KOF Leading Indicator is due on Wednesday, and the PMI is due on Thursday (both have EMEA-MAP relevance scores of 4). We envisage a slight sequential slowdown in both the KOF and the PMI, primarily due to the pace of acceleration they have shown in recent months. The KOF has risen for 13 consecutive months – we expect a setback in June from 2.16 to 2.13. The PMI has also jumped over 10 index points in the space of 5 months – we expect moderation from 66.4 to 66.1. It will be interesting to see whether the persistent strength of the trade-weighted CHF begins to weigh on business sentiment.
-10 Norway also publishes its PMI this week; we think it’ll increase to about 51 (after 50.1 in May), which will move it in the direction of some of the other, more upbeat surveys (particularly Norges Bank’s regional network). This would still be well behind the PMIs of other European economies, and we would expect further gains going forward. (EMEA-MAP relevance score: 3). Norway also publishes retail and unemployment numbers this week.
-11 In Sweden the main event this coming week will be the Riksbank meeting. Our central view is that they will hike 25bp both now (and again in September, rather than by 50bp in September), but we don’t have strong conviction on this one. The July Monetary Policy Report accompanying the Riksbank’s decision will also be interesting to watch for potential revisions to the central bank’s outlook for growth and inflation. Following a 50bp cumulative tightening in Q3, we expect the repo rate to reach 1% and 3% by end-2010 and end-2011. The Riksbank’s latest published path had 0.7% for end-10 and 2.4% for end-11.
… and that’s the way Europe looks from my unbelievably green garden on this gorgeous afternoon. I shall now pour myself some sort of chilled and lovely summer drink and turn to my favourite book.
And here is why Erik thinks Wednesday will be a very big day for Europe:
Wednesday, June 30, will be a big day in Europe. I discussed the two big “macro events” – namely the German presidential election and the Commission’s release of its proposed scorecard – in my weekend email yesterday.
In addition, there are two very important “micro events” on Wednesday:
The first ECB 12-months LTRO - €440bn – is due back on Wednesday so the question is where the banks go get the money. There is presently €310bn excess in the system which is some €200bn more than usual, so in a very simple sense, maybe the banks will fund some €220bn at the ECB’s 3-months LTROs. However, that’s a big number and doing so at 1% when 3-months Euribor is a good deal cheaper might highlight that there are still a lot of banks without access to the interbank market. As a rough guess, therefore, maybe we’ll see €150-200bn taken from the ECB and the rest from the interbank market? If we were to see them take well over €200bn from the ECB on Wednesday, Euribor would likely move higher and concerns about the banks might increase yet again. Banks might take a big number though simply to play it safe – or because they see increasing opportunities again: Lending even to the non-financial corporate world was up in May for the first time in 16 months, and with the EFSF getting in place, maybe banks will become more interested in lending to the sovereigns again?
Also on Wednesday, Greece formally falls out of the indices because of their downgrade. How much selling will that cause? I have no clue, but I would fail to understand why investors would have waited till the last day to get rid of their Greek bonds when they have known about the issue since June 15. Indeed, we saw quite a bit of selling right after the news of the downgrade came out (and probably a good chunk of ECB buying of Greek bonds at that time.) Which leads me to the new announcement that the Greek governments intends to roll over 3, 6 and 12 month treasury bills maturing in July; a total of about €3.5bn. Auctions are expected on Tuesday 13th and on Tuesday 20th July. Since the IMF-EU package is fully funded (i.e. no need for commercial borrowing) through 2011, and the numbers are coming in somewhat better than expected, there should be no need for this borrowing – so why are they doing it? Could it be that they are responding to demand from banks and other investors who have started to appreciate that a debt restructuring the next 12 months is very unlikely and therefore looking for high-yielding assets? If so, this would be a mis-guided move, in my opinion, and – frankly – I hope the IMF and EU would tell them to back off.
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Robert Byrd died. Special election on the way.
Waiting for Chile... Beers in the refrigerator...
I feel chis-sick.
Erik Nielsen is a douchebag.