Winter’s Weekly Economic Thoughts.
The weeks past and ahead by Alastair Winter,Â Chief Economist at Daniel Stewart.
The week ahead
- With macro punters looking for quick bucks, the latest rallies in equities, gold, oil and the euro are unlikely to last until the end of the month. That still leaves time for at least one more rally in December before the holiday season.
- The only serious candidate for prolonging these rallies is a proper deal over the fiscal cliff but that may not happen until mid-December.
- A deal for Greece does look probable on Monday or Tuesday and will no doubt be convoluted in order to postpone (and disguise) the inevitable transfer of money to Greece from (mainly) Germany. All largely discounted already.
- The good news in the US housing market should continue and the second cut of Q3 GDP on Thursday should see an upwards revision. However, Storm Sandy may have caused a dip in October’s Personal Incomes and Spending and the November Chicago PMI (all on Friday).
- The UK also reports the second cut of Q3 GDP together with the Index of Services and Business Investment (Tuesday) and those out to hatchet Chancellor Osborne may be disappointed. Consumer Credit, the CBI Retailers Survey and the Gfk Consumer Confidence (Thursday) are more likely sources of ammunition for his critics. Markets in contrast will probably not be interested in any of it.
- More bad news from various EMU countries on Unemployment will also probably make no difference one way or the other.
- On the other hand, a raft of dire data from Japan (Thursday and Friday) could bring a dash of reality to the recent excitement resulting in lower Japanese equities and a recovering yen.
- In other words, the latest rallies are driven by sentiment rather than fundamentals and will stop once enough punters think it is time to rescue their 2012 performance with some much needed profits.
- It was ‘all change’ in most equity markets as macro investors, having the previous week grabbed profits from Q3 while they lasted, piled back in and clocked chunky gains of 3-5%.Â Gold and Oil prices were not far behind and, in a sure sign of uninhibited punting, Silver leapt by 5.7%.
- The biggest moves were in European equities, which made one wonder if, all of a sudden, Mrs Merkel had agreed to a new Greek haircut, if Mr Rajoy had finally asked for help, if the EU budget was agreed without rancour, if Moody’s had retracted the downgrade of France or if the EMU recession were not taking place. Ahem!
- There was a bit more of an excuse for US equities to rally even if, because of the Thanksgiving holiday, there were no new significant developments on the fiscal cliff.Â Â Certainly, the reversal of the previous week’s (modest) drops in yields suggested that bond investors think a deal is now more likely. As usual these days, yields on all the ‘safe’ sovereign issues moved up together while those on the less safe Europeans moved down together.
- There was no let-up in the spree in Japanese equities and the bashing of the yen and all because the hapless Noda government is expected to fall and that clever Mr Abe will take over and fix everything
- Almost inevitably, the euro’s fan club returned and the punters were clearly waiting for them. The yen and dollar were the chief casualties.
- As has become the norm, the pound could not keep up with the euro when it is rampant but it did gain against the dollar in its wake.
- It is still too early to describe the US housing market data as ‘strong’ but the recovery is now properly underway and it is working through to personal consumption.
- The monthly PMI cycle has kicked off with slightly better news from the US and China but definitely not from Europe in the flash reports. In Germany, the IFO Business Climate survey provided a modest respite in the gloom.
- Moody’s downgraded France some ten months after S & P. Fitch have not yet budged but all three major agencies ascribe a negative outlook. Investors in French equities, bonds and the euro took not the slightest interest.
- There was more soft data from Canada, suggesting that the strong loonie is starting to take its toll on the economy.
- In the UK, the build up to the Chancellor’s Autumn Statement continued with disappointing public borrowing numbers, albeit lower than the previous month. However, these are subject to endless revisions and while Mr Osborne looks set to miss his debt and deficit reduction targets it would be wrong to predict panic measures from him. It remains to be seen how willing he is to admit that he has a new plan after all, whether it be Plan B, Plan A+ or even just Plan A with significant ‘new’ (actually well-flagged) twists on pensions and welfare benefits.