The Global Market Weekly – 10/21/11

Posted October 21, 2011 by CLeahey

[private][private]Prepared to be Under Whelmed

The EU meetings this weekend are still on but will now make no decisions regarding extra resources to the EFSF. Instead, it may deal with matters related to Greece and the recapitalization of banks. In this regard, it may formalize that Greek debt-holders would be pushed to accept a 50% haircut on their bonds, but in a voluntary manner so as to avoid a formal default.  There should also be a general acceptance that banks would need to raise at least  €80B in new capital, an estimate many think is far too low.

Even so, it has to be stressed that the gap between Germany and France over the EFSF is huge.  France knows that increasing domestic fiscal restraints means that it and most other Eurozone countries cannot provide any more money directly to the EFSF without endangering debt ratings: The ability of the EFSF to raise rescue money at low interest rates is tied to triple-A status, meaning a French downgrade could potentially undermine the bail-out system itself.

Therefore, France wants Germany to change its stance either on the ECB leveraging up the EFSF or by providing more funds directly.  Such action could clearly address some of the Eurozone’s underlying problems.  But for Germany, letting the ECB leverage the EFSF is not only anathema but a blurring of fiscal and monetary policy that is also considered to be contrary to the Maastricht Treaty itself.  In addition, German politics effectively prevent any consideration of the country increasing its part of the EFSF.

Maybe a compromise could be found by the Wednesday Summit, possibly by resorting back to a plan to allow an effective leveraging of the EFSF by it guaranteeing some debt, although this option too is fraught with problems.  In the meantime, whatever progress is made at the Sunday Summit will pale into insignificance as the resources that may be needed to fund any such new measures will remain in doubt.

• U.S.:  The parade of relatively constructive figures continues.  Expectations are for a rebound in Q3 real GDP growth.  Home sales data for September will be weak, though no worse than in recent months.  Strong retail sales points to strong growth in overall consumer spending in September, despite a huge deficit in consumer confidence about the economy that likely didn’t improve in October.
• Canada: Markets are erring on the side of an eventual rate cut by the BoC.  Reaching the required bar would require a sharper deceleration in the global outlook or a clear sign that inflation will undershoot the target.
• Eurozone:  Markets will be digesting the news (and lack of progress) from the scheduled summits, while business survey readings will give insight into just how frailer the Eurozone economy has become.
• Sweden:  The Riksbank is seen keeping its repo rate unchanged at 2.0% this week but the question remains to which the central bank more clearly postpones the further rate hike implicit in its previous rhetoric and forecasts.
• United Kingdom:  Current account figures for Q2 belatedly arrive on Tuesday. Otherwise, the week has a number of survey updates on both businesses and consumers, including the CBI Industrial Trends and Distributive Trades surveys, as well as GfK consumer confidence numbers.  There will also be insight into the BoE, as Governor King and Deputy Governor Bean will attend a parliamentary hearing to answer questions about quantitative easing.
• Japan:  The BOJ’s Outlook should incorporate some downgrading of the fiscal 2012 forecast.  Data include the September merchandise trade report, retail sales, Labor-force survey, and industrial production.  Also appearing is the Sept. CPI. .
• Emerging Markets/Regions:  The recent Q3 data in China are consistent with gradual slowdown that will ease inflationary pressure.  The upcoming Korean GDP release will underscore the vulnerabilities to the ongoing growth slowdown in the region.  Three central banks meet.  We expect policy on remain on hold in Russia and Hungary, while another rate is expected in India. .

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