Winter’s Economic Shot – by Alastair Winter, Chief Economist at Daniel Stewart
Week Ahead
Markets
Equities generally look set to benefit from continuing optimism but those in Europe and Japan look exposed to some profit-taking after the last few heady weeks.
The euro looks to be struggling to go higher and this together with further selling of the yen means it must soon be the dollar’s turn to rally. The pound is facing another bad week.
Politics
In the US cliff-dance, the GOP are trying to fight back with a proposed three-month extension to the debt-ceiling GOP and have a new slogan ‘no budget no pay’ in case the Democrat majority in the Senate fail to respond with new ideas on spending cuts. Something has to done by 15th February when $30bn of interest payments on Treasuries becomes due.
The SDP-Green coalition’s win by a single seat in Lower Saxony will make Mrs Merkel even more reluctant to hand over German taxpayer money (to Cyprus or anyone else) while raising hopes of the French and Italians that they will see the back of her in September and then get their hands on German money. Result: months of stalemate in EMU!
In Italy, the Berlusconi electioneering blitz is likely to narrow further the Left’s lead from the current 6% and force Mr Monti’s centrists into an uneasy alliance with the Left. It may also give Il Cavaliere a blocking majority in the Senate.
Mr Netanyahu looks set to stay as Prime Minister after Tuesday’s election and this will stiffen his terms for any two-state solution and may reduce his need to sabre-rattle at Iran as a smokescreen.
Economics
The UK tops the bill with the first cut of Q4 GDP growth (flat at best but probably negative) but Unemployment, Public Sector Borrowing and the CBI Industrial Survey should bring modestly better news. The CBI Retail Survey may also not be as bad as the ONS December Retail Sales suggest.
The two major Germany Surveys (ZEW on Economic Sentiment and IFO on Business Climate) are unlikely to repeat December’s surprise improvements.
The global monthly PMI cycle kicks off and China and the US should make up for any setbacks in Germany, France and the EMU following December’s slight improvements.
Last week
Markets
Optimism reigned apart from brief bursts of twitchiness about the cliff and the outlook for growth globally and in Europe.
City Buildings by Wjfox2005 (PD)
With day-traders in charge, the heady gains in equities of recent weeks slowed. The DAX ran out of steam after a storming performance in 2012 and the IBEX ran into bit of nervousness. The only decisive move (and mainly on Monday) came in Shanghai with more rumours of an increase in permitted foreign investment in local companies and was consolidated on Friday with positive economic data.
Bond yields quietly reversed direction from previous week, albeit not by much: i.e. safe bond yields were lower and those for Spain and Italy higher.
Gold prices were quite volatile but made little net progress while silver bounced back after its thrashing in recent weeks. Wheat jumped on renewed fears for winter harvests.
The loquacious (but very amusing) Jean-Claude Juncker of Luxembourg did his best to talk down the euro but it still managed strong gains against the Swissie (traders giving up at last) and the pound (traders pouncing). In fact, the pound was under pressure on all fronts as was the yen. The rupee (up) and rand (down) reflected the growing consensus on the heath of the Indian and South African economies.
Politics
He may still be digging an ever bigger hole for himself but there are just a few signs that Mr Cameron may be after all be hitting the right note of the UK’s staying inside the EU (opinion polls are moving that way) and pioneering reforms (rather than opt-outs) that (he hopes) others can sign up to. Still a hole, nevertheless.
Disbelief in the UK press that a minister knew what he was talking about seemed to get as much attention as the fact that almost everyone will be worse off down the road. The real significance is that the UK is the first major economy to be facing to up age demographics and trying to make pensions affordable over the long-term. That is the right sort of austerity.
The IMF have started the fight-back against the EMU leaders over Greece by letting it be known that the continuing recession will mean another bailout will be necessary next year and recommending cutting interest rates(again) on the rescue loans to almost zero (i.e. a subsidy from all the other EMU members). Just when Mrs Merkel thought she had kicked the can beyond the elections!
Economics
The US data was on the whole very encouraging: inflation at its lowest for over a year and, solid retail sales and industrial production and yet more good news on Housing. However, the latest survey data (Consumer Sentiment, industry in New York and Philadelphia Fed areas) was surprisingly soft.
China figures on Q4 GDP, Industrial Production and Retail Sales were very positive and the Bureau of Statistics has responded robustly to the doubts expressed over the Trade Figures released in the previous week.
Elsewhere the numbers were unambiguously disappointing: Inflation and Retail Sales in the UK, negative growth in Q4 GDP in Germany, Industrial Production and Consumer Confidence in Japan and Unemployment in Australia. Nobody seemed to care much, however.
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