Monday Economic Shot by Alastair Winter, Chief Economist Daniel Stewart & Co.

The Week Ahead  – 7 January 2013

Markets

  • The logic of day-trading points to most equity markets pushing higher for now. Last week’s fix in Washington seems more like an excuse than a market driver. US GDP will be reduced by at least 1% and there are spending cuts to come.
  • Moreover, the global economic outlook for 2013 still does not look very much better than last year’s out-turn, with no significant improvement before the summer at the earliest.
  • Bond investors could well regret their over-hasty reaction to the December FOMC minutes and those returning from holiday may sniff some bargain buys in gilts and bunds and also quick profits in Italian, Spanish and Portuguese government bonds.
  • In the FX market, developing countries’ currencies are likely to see more buying while the dollar holds on to its gains vs. other major currencies and gold.
  • Whatever happens next week, most if not all the movements will be reversed before long.

Politics

  • Amidst bitter recriminations within the GOP, Mr Obama must surely try to avoid triumphalism and become more explicit on the trade-offs between growth and the deficit. His hard line on the debt ceiling being ‘non-negotiable’( on the reasonable grounds that Congress must pick up the tab for its spending plans) opens the way to some serious debate within, as well as between, the parties  on tax loopholes, insolvent entitlement programmes and defence spending. There will also be plenty of excuses for speculative punts in equities, bonds and FX!
  • Over the next few weeks the world will be amazed all over again by the detachment of Italian politicians from the real concerns of the voters. Mr Monti is already showing his political inexperience in clumsy sermonising and, more importantly, in allowing Mr Berlusconi to reassert his dominance of the centre-right.
  • The UK Coalition will publish its mid-term review and set its programme until the next election. This is likely to give the lie to all the somewhat stage-managed mutual attacks in recent weeks: it will stick together until May 2015. Speculation over Mr Cameron’s impending speech on Europe will continue to mount. Given his commitment to the Single Market (which clearly will win over his self-trumpeted Euroscepticism), he would do best to promise an ‘in-out’ referendum but not now or even by a fixed date. So much is in a state of flux that he may choose (rightly) to argue how much better it will be to exert influence from the inside.

Economics

  • China’s monthly batch of data for December is due to be published, with the customary remarkable promptitude on Wednesday, Thursday and Friday. It may well disappoint the China-ultra bulls unless it includes sharp upturns in both exports and imports. The latest censorship crack-down looks like storing up economic as well as political disruption down the road.
  • European data is expected to be soft and interest will centre on how much the German economy (Industrial Production on Wednesday) is being pulled towards recession by the rest (EMU Unemployment, Retail Sales and Consumer Confidence). Probably rather a lot.
  • The UK kicks off its official monthly reporting cycle with November’s Industrial Production and Trade: the numbers should be better than the previous month but still rather soft.  The British Retail Consortium has already been sounding gloomy about December sales and it reports on Wednesday.
  • The MPC (QE) and ECB (rate cut) announce their latest decisions on Thursday but both will probably hold off again: the former pinning its hopes on the FLS and the latter hanging on to one its few remaining bullets.

Last week

Markets

  • The exuberant start to the New Year is deemed by some to be a relief rally but most equity markets had been restless for much of December and the deal in Washington made easy the choice between going up or down.
  • Much more of a surprise was the reference in the FOMC minutes to ‘several’ (code for 4 or 5) committee members contemplating slowing or stopping QE ‘well before the end of 2013’. Sure enough, US Treasury yields went up by 10-20 basis points, the dollar gained against most other major currencies and gold. However, bond markets and emerging currencies elsewhere reacted with an alacrity to match equities: gilt and bund yields shot up 20 basis points and those for Spain, Italy and Portugal plunged. The Australian dollar, the Mexican peso and the Brazilian real led the charge against the buck.

Politics

  • The good news from the US is that bipartisanship returned to Washington under the genial guidance of the evergreen Joe Biden but judging by the lachrymose Mr Boehner’s expletives directed at senior Democrats the GOP does not much like it. Mr Obama, wearing his ‘CEO hat’, probably gave away more than he needed in order to get a deal done but at least he now knows how divided the GOP really is.
  • Mrs Merkel has been sounding apprehensive about just about everything, including Germany’s own fiscal deficit. Her track record in last year’s regional elections was hopeless and yet another one is coming up in Lower Saxony. Her biggest concern, however, must be the resurgence of her ‘bestia nera’, (aka ‘Il Cavaliere’) who is gaining support for his own brand of Euroscepticism. Mr Berlusconi is becoming ever more outspoken on German austerity and questioning staying in the EMU (Itexit?)
Currencies by Hersfold (PD)

Currencies by Hersfold (PD)

Economics

  • The December US Non-Farm Payrolls were really quite good (the ADP Private Sector payrolls were even better but the unemployment rate of 7.8% is still well above the FOMC’s target of 6.5%. The latest minutes show that most FOMC members are not worried about inflation but they have revised down their forecasts for growth and unemployment.  Some of them are concerned about the manageability of the QE programme but only Mr Lacker (who has now retired by rotation) seems to want or expect to take away the real ‘punch bowl’ (i.e. increase rates) until 2015.
  • The whole gamut of PMI/ISM surveys were released and the global picture is improving, led by the US and India. The various China reports were solid enough and even those from Europe were slightly better, although still very weak.
  • In the UK, the Manufacturing PMI jumped back into expansion but Construction remained weak and Services slumped into contraction. This bodes ill for Q4 GDP, which will struggle to show any gain.

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