US super committee will attract attention this week
11-21-11
- The Chart of the Week shows the three month euro-US dollar cross currency basis swap. The euro zone sovereign debt crisis is on a dangerous path as the focus of investors has widened to other countries than the so-called 'PIIGS' countries. For example, also the spread between German and French and even Austrian government bond yields picked-up last weeks. In addition, the chart shows that costs for swapping euros into US dollars have increased sharply to the widest levels since late 2008, despite the ECB's attempts to ease dollar funding costs by conducting liquidity providing operations.
United States
- Although the world is focusing on the fiscal situation in the euro zone, it was only a few months ago that the situation in the US was a source of concern due to a political fight over raising the debt ceiling. Politicians closed a deal in the 'last minute' late July/early August that included, amongst others, to reduce the federal budget deficit by almost USD 1,000bn over 10 years. In addition, a bipartisan committee consisting of 6 republicans and 6 democrats was tasked with identifying USD 1,200-1,500bn in deficit reductions in the coming 10 years. This Wednesday, the committee should report their recommendations, after which the congress is required to vote on the committees recommendations by 23 December.
- Macroeconomic data showed that the US economy is on track to report again an expansion of economic activity in Q4 of around 2%.
- CPI data confirmed that inflation has peaked. The annual inflation rate fell to 3.5% in October from 3.9%, and we expect a further decline in the coming months.
Euro zone
- The 'project' euro zone continued to be tested everyday last week. So far, politicians have failed to stem contagion concerns. It is getting increasingly difficult to convince investors that all will be fine and under control as concerns are spreading to the core countries. For example, government bond yield spreads of France, Belgium and even Austria have picked-up compared to German Bund yields.
- France is not considered an AAA-rated country anymore by the markets given the recent pick-up of government bond yields and spreads over German bunds. The countries fiscal deficits are too high, while it has a growing current account deficit. We are not convinced that the newly planned austerity measures of about EUR 18bn will be enough to bring French public finances on a sustainable path. In addition, elections in April/May may make it more difficult to implement the proposed fiscal tightening. Even if all goes as planned, we are concerned that the 1.0% economic growth forecast by the French government for next year (and 2.0% in 2013) is too optimistic.
United Kingdom
- It seems that inflation has indeed peaked and that expectations for a sharp decline of the inflation rate in the coming months still makes sense. After all, last year's VAT rise and sharp increase in food and energy prices will drop out of annual inflation calculations. Consequently, CPI inflation is forecasted to drop towards around 3.0% in the coming months and, if our forecasts are correct, this will give policy members enough ammunition to argue that more asset purchases are warranted.
- MPC members are not only expecting somewhat lower inflation rates, but they are also confronted with growing evidence that the economy is at risk for falling into another recession. Given that the committee expects inflation to fall well below 2% by the end of 2014 and economic growth is projected to slow further in the near-term, we should be prepared for another round of asset purchases, probably in the size of about GBP 50/75bn.