Divergence between US and euro zone economies
01-09-12
The Chart of the Week shows annual retail sales and overall consumer spending growth in Spain. There are several reasons why we are not reassured that Spain will continue to avoid the fate of Greece, Ireland and Portugal whom all needed a bail-out over the last 2 years. For a start, just as in Greece we think that Spanish economic data is of suspicious quality. Moreover, already for some time there have been lingering concerns over the Spanish central government's ability to track and to contain the deficit data of the regional governments.
United States
- Data continued to signal that there are few reasons to be too concerned about US economic growth in the short-term. The ISM manufacturing index rose to 53.9 and non-farm payrolls rose 200k in December.
- However, we think that the strength of the data has to be interpreted with caution. For example, some of the strength of the ISM index seems to be due to tax advantages and while the labour market report was strong, we note that the +42k job gains in the couriers and messenger sectors will likely reverse in January.
- Overall, we don't expect FOMC policy action in the near-term, but remain confident with our expectation that additional policy action will be announced later this year once economic growth weakens and inflation drops. Yet, as we discussed over the last couple of months, the Fed will change its communication strategy to improve transparency first.
- From now on the Fed's economic projections (that are published four times a year) will include projections of appropriate target federal funds rate levels, while key variables underlying the assessments and qualitative information regarding expectations for the Fed's balance sheet will be included in an accompanying narrative. These projections will likely especially affect short-term market expectations, but they are expected to have less effect on longer-term market expectations.
- Elsewhere, we have often discussed that also the fiscal situation in the US is unsustainable in the long-run. This situation will unlikely improve in the near-term given this years' presidential elections and, unsurprisingly therefore, debt ceiling discussions pop up regularly. As the debt that is subject to the debt limit was only USD 25mn of that limit on Wednesday, Obama will soon ask for another increase in the federal debt limit by USD 1.2trn to USD 16,392trn. Indeed, also in the US, politicians will leave a big stamp on sentiment this year.
Euro zone
- The first week of the year was again mainly about the sovereign debt crisis. It was worrisome to see that French bonds underperformed most other bonds again and consequently the yield spread with German Bunds widened further. One of the things we discussed several times last year is that the countries' fiscal and economic situation is weak compared to other AAA-rated countries. In addition, its government debt is relatively high as a percentage of GDP.
- Yet, not only is the French public sector a source for concern as the countries' non-financial corporate sector is also relatively highly leveraged (as a percentage of GDP). The shift in focus towards France, which is also partly due to bank exposures to the periphery countries, may therefore pose an additional risk to the economy.
- There are several signals that foreign investors have reduced their exposure towards and are reluctant to lend to euro zone banks. For highly leveraged sectors this is bad news as current developments will likely result in higher borrowing costs and/or tighter lending criteria for borrowers. An interesting development is that banks in France are expecting to tighten lending criteria at a faster pace than banks in the euro zone as a whole.
- News from the periphery countries is bleak. For example, Portuguese consumer confidence plummeted to a record low of -56.8 and also the Economic Climate Indicator declined to a record low of -4.4 in December. In Greece, the situation is dramatic amid an economy that is in depression and unemployment that continues to rise. In fact, we wouldn't be surprised if the unemployment rate will be higher than in Spain by the end of the year, As regards Belgium, the Flemish paper De Morgen reported that the budget plan for 2012 was rejected by the European Commission as its assumption would be too optimistic.
- Also macroeconomic news from Germany was disappointing as factory orders plunged 4.8% (mom) to 4.3% (yoy) and euro zone retail sales fell 0.8% to -2.5% in November. The start of the year 2012 was thus all but happy for the euro zone and we fear that the rest of the year will be not much better.
- Apart from that market participants will turn their attention on the Spanish and Italian bond and bill auctions on Thursday and the meeting of Sarkozy and Merkel today, this week's economic agenda focus on the ECB meeting. We don't expect a rate cut in this week's meeting, while Draghi will probably continue to resist starting full-blown QE.
United Kingdom
- There was finally somewhat positive news from the UK as the PMI business surveys signalled that the construction and services industries were still expanding in December. Accordingly, the PMIs suggested that growth has picked-up somewhat at the end of last year, but the indices also suggest that there was basically no growth in Q4.
- Unfortunately, prospects remain bleak amid low business confidence about the economic outlook. In our view, risks for a recession are still alive.
- We also expect lending criteria to remain tight based on weak economic conditions.
- This week's agenda will focus on the BoE meeting. Although there is a risk that the BoE's MPC will announce an increase in the Asset Purchase Facility this month already, we expect such an announcement next month in our base case scenario.