The Global Markets Weekly – 2/8/13

Posted February 11, 2013 by rvillareal

Some U.S.Budget Wiggle Room?

TheUSbudget season began in earnest this week with the release of the CBO outlook.  The CBO budget baseline provides the framework upon which Congress produces its own policy proposals in response to the president’s own budget submission in the next month.  The CBO report had good news and bad news.  The good news is that the federal deficit should decline to less than 3% by 2015, assuming Federal receipts snap back to their historical 18.5% of GDP.  The bad news is that’s it.  The deficit begins to widen and debt to GDP ratios climb towards 77% by 2023, compared to 72% currently and just 36% in 2007 before the crash. [private]

The CBO indicates that it would take a lot more work to get the debt to GDP ratios on a declining path.  In addition to roughly $2.7 trillion in 10-year budget savings implicit in the baseline, deficits would have to cut another $2 trillion to put the debt ratio on a modestly declining path towards 70% in 10 years.  To pull the debt ratio down to 60% in 10 years would require $4 trillion in additional deficit reduction.  Those are BIG numbers.

Nonetheless, the CBO report takes some of pressure off Congress and the administration “to do something” this year “to fix” the budget.  In fact, Congress may be able to postpone the unpopular sequester, set to begin March 1, in favor of a larger budget deal to pulled together at a future date, citing the improved budget outlook and the danger the sequester might impose on a sluggish recovery.  But delay has significant costs down the road, as the failure to implement the $1.2 trillion in 10-year savings from the sequester would lift the debt ratio towards 85% within 10 years.

• U.S.: This week, January retail sales (Wed) and industrial production (Fri) figures will clarify the Q1 economic landscape, and the February UofM/Reuters consumer sentiment (Fri) survey will update whether the payroll tax is hitting confidence.
• Eurozone: The main data event will be the Q4 GDP numbers on Thursday. The better trend in more up-to-date numbers suggests the Q4 slump will be relatively short-lived. That means markets may treat the Q4 drop as the ‘darkest before the dawn’.
• UK: The next BoE Inflation Report (Wed) and accompanying press conference may see Governor King pressed on comments regarding the need for some debate on central bank thinking.  Also, it is quite possible the updated Report shows projected inflation above target two years hence.
• Japan: Key this week is Q4 GDP (Thu) for indications on whether the economy bottomed. Little is expected from the conclusion of the monthly BOJ policy meeting (Thu).
• Emerging Markets/Regions:  In Korea, the Bank of Korea will hold a policy meeting. Consensus expects no change, but DE believes there is a fair chance of a 50 bps cut. In Mexico, data on industrial production could improve over coming months as the U.S. outlook appears brighter.

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