A Look At The Remainder Of The European Week Through The Eyes Of Chiswick's Favorite Uberbull
Goldman's Erin Nielsen is early in his weekly outlook report which however will not catch anyone by surprise. Somehow the Goldman strategist looks at recent economic data coming out of Europe, which even CMA said was indicative of a start of a double dip, and calls these "great macro numbers" - this kind of stunning subjectivity used to get analysts fired in the past; now it gets you promoted to partner; oh well, you can get the man out of the bias but you can never get the bias out of the man and all that. Furthermore, despite Germany making it expressly clear than any future bailouts will hinge on restructuring, Nielsen is adamant that this too is a misread: " I strongly disagree with some of the aspects of what has been reported
in the press today as being the German proposal, particularly as it
relates to making a future rescue conditional upon debt restructuring." Well, Erik, there is the German people, and there is your opinion. q.e.d. The balance of the note is filled with the same traditional permabullish fluff, which would have forced those who followed Nielsen's always rosy advice to incur irreparable P&L damage. But since the man has a verbiage quota to fill (regardless of content quality), and skeptics to amuse, we are confident he will have a long and prosperous career at Goldman. In the spirit of thanksgiving: we thank you Erik for providing countless hours of naive amusement.
From Goldman's Erik Nielsen:
It’s Thanksgiving tomorrow – this wonderful holiday when you get to spend time with your family, eat all you want (without anyone complaining), and you don’t have to go through the stress of having to swap presents with everyone. I absolutely love it. But it also means that I won’t be doing my usual Sunday email because, for me, this is a “long weekend event” – and I’ll be away. Instead, these are my brief thoughts on Europe for this week and next:
- Still more great macro numbers out of Europe this past few days.
- The “big” existentialistic discussion of the Euro-zone has returned, sending the Euro weaker. I summarise my views – but I strongly recommend a look at the great interview with Barry Eichengreen on Europe and the Euro on www.five.bookscom.
- Next week we’ll get still more information on growth – composition in the Euro-zone and new Q3 numbers out of Scandinavia
- And the ECB meets to talk about exit.
- We might also get more details out of Ireland.
1. The macro numbers just keep coming in at beautiful levels. Yesterday we had a the Euro-zone November PMIs handsomely beating consensus. Manufacturing accelerated to 55.5 from 54.6 while services shot up to 55.2 from 53.3. And it was not only Germany; French manufacturing reached its highest level in ten year! But Germany is not too far behind; today’s Ifo saw a massive jump to 109.3 from 107.7 (putting consensus’ expectation of a small decline to shame.) The resurgence so far in Q4 is truly impressive and the continuing improvement in the forward-looking expectations component suggests that this momentum should not be letting up anytime soon.
2. The other big things this week has of course been Ireland and a renewal of the whole discussion of the sustainability of the Euro-zone, specifically in light of statements out of Germany. My view here is pretty simple: The political leadership has acknowledged that the Euro-zone construction was not done properly; among many other things it missed good policy rules and enforcement as well as an arrangement to deal with crises - and (since this is NOT a tax transfer union) it missed debt issuance rules (particularly Collective Action Clauses) that would make it possible to restructure sovereign debt, if it were to become necessary. So the officials are now hard at work on two issues relating to these problems. First, they want to design a more sustainable construction for the future Euro-zone. I have heard lots of criticism of the Germans in this area, and while I agree that the communication has been upsetting for the market, I also have some sympathy with the view that once we have identified the issues, let’s get on with the task of fixing them – even if it implies some shorter term costs – rather than delaying it for 2-3 more years. That said, I strongly disagree with some of the aspects of what has been reported in the press today as being the German proposal, particularly as it relates to making a future rescue conditional upon debt restructuring. Second, officials are hard at work trying to figure out how to deal with the debt that’s already in the system; in other words, sorting out where to build the fences for what will be protected and what could be exposed to burden sharing with the private sector. Where they’ll come out on this important tissue, I am not sure, but its something I plan on writing much more about in the near future. Incidentally, when you think of these fundamental issues, I highly recommend a visit to one of my favourite websites: (http://fivebooks.com/interviews/barry-eichengreen-on-euro) and the interview with Barry Eichengreen of Berkeley in which he recommends his five favourite books on the Euro. If you have time over the Thanksgiving weekend, you really should read a couple of the books as well.
Moving to next week:
3. Next week will see the detailed Q3 GDP numbers for the Euro-zone (Thursday). In Q2, 90% of the growth contribution came from final domestic demand and only 10% from net exports; we suspect that while domestic demand will continue to be the key driver of Euro-zone growth in Q3, the distribution might have turned a little more even. Sweden prints its first Q3 GDP number (Monday); we expect +1.2%qoq, non-annualised. As shown by Norway’s already published Q3 number, Scandinavia remains on fire. Both Sweden and Norway prints PMIs on Wednesday; both should show still more robustness. Sweden may be down a tad (but still above 60) and Norway will probably be up a tad.
4. Also next week, the ECB meets on Thursday. They publish new 2010-11 numbers and their first 2012 forecast. Its getting clear that they have underestimated the recovery this year (three months ago, the GC appeared so nervous about their staff’s – still too low – numbers that they attached downside risk to the staff numbers on the same day they published them. Strange. I suspect that they’ll be eating some humble pie very soon. We think their 2012 inflation forecast will see the target (1.9%) slightly reached, which obviously raises the attention around the present very accommodative monetary policy stance. We think they’ll announce a continued gradual withdrawal which will include an end to full allotment for anything longer than 7-day money, to be phased in gradually during 2011 (probably 2011’H1). The risk is toward a slightly more uncommitted tone because of Ireland. Its clear that the ECB was the key promoter of a program for Ireland after the Irish banks had become so dependent on the ECB – and presumably run out of collateral so that they had to tap the ELA for about €34bn.
5. On Ireland, we should hopefully get some more details out on the program in coming days and next week, including clarification on whether (and in what shape) the 2011 budget will pass, and what happens to bank debt. The four year program, which forms the basis for the entire rescue, is scheduled to be voted through the week after next, on December 7.
With that – I wish everyone a wonderful Thanksgiving – and I thank the very many of you who so often reply to these (usually Sunday) emails from Chiswick with thoughts, questions, observations (and the occasional criticism) – all so very much appreciated.