Euro area: Pressure on the core increases
The debt crisis is changing character – from focusing on a few southern European countries to a general fear and investor flight from almost everything European. French spread widening has continued, as Fitch warned that France has limited room for manoeuvre without losing its AAA status and on Wednesday Germany experienced a failed auction. On Wednesday, the European Commission also presented its paper on Eurobonds – or stability bonds as they call them. This could be a solution to the debt crisis, but Merkel greeted the paper by saying that it was “exceptionally worrisome, inappropriate” that the Commission had proposed Eurobonds. On Thursday Merkel and Sarkozy said that they will go ahead with treaty changes and confirmed that they will do everything it takes to save the euro. At the same time Merkel continues to reject any idea that could do just that. On Thursday, Fitch downgraded Portugal to junk status emphasising that a deepening recession made it much more challenging to cut the budget deficit. The perception among analysts is now that only Eurobonds, or a significant increase in the ECB‟s buying of sovereign bonds, are the only two options remaining that can halt the escalation.
Activity indicators for the euro area published this week came out notably better than expected, but still indicate recession in the euro area. New orders look particularly bad signalling that the recession might not be as mild as hoped. Export orders are weakening too, as the debt crisis is beginning to drag trading partners down. The service sector PMI was more upbeat and shows particular resilience in France – although we do not believe that it is going to last and in any case it has been rather volatile. German Ifo expectations also increased and current conditions remained unchanged. Looking forward, we expect the Ifo to decline moderately. Our Ifo expectations model is pointing down now and the OECD leading indicator is much more downbeat with signals that we could see further drop in Ifo expectations.
US: Super Committee fails, Q4 tracking 2½-3% growth
US politicians once again demonstrated the lack of decision power as the so-called Super Committee failed to reach an agreement on finding USD1.2 trillion in savings over the next 10 years. With the two chambers in the Congress being split between a Democrat majority in the Senate and a Republicans majority in the House, the opposing views on how to tackle the debt challenge is blocking any real long-term plan. We‟ll likely have to get on the other side of the elections in November 2012 to see any real long-term plan materialise. Both parties seem to bet on having a majority in both chambers after the election in order to get it their way in dealing with the debt issue. Fortunately automatic spending cuts of USD1.2 trillion are due to kick in from 2013, so the lack of an agreement does not have any severe effect on the debt plans. The main effect is that it underpins the picture of lack of political decision power currently.
On the data front we saw slight disappointments this week after a period of mainly positive surprises out of the US. GDP for Q3 was revised down to 2.0% from 2.5%. However, this was mainly due to a downward revision of inventories, so it will likely mean the positive contribution from inventories in Q4 will be bigger instead. However, it doesn‟t raise our expectation for Q4 of 2½-3%, since other data was on the soft side. Core durable goods orders lost some momentum with core capital goods orders falling 1.8% m/m in October. And personal consumption was also slightly weaker at 0.1% m/m in October, but since September spending was revised higher, private consumption is still tracking around 2½% in Q4, a little higher than in Q3 where it increased 2.3%.
Initial jobless claims continue to trend lower pointing to some improvement in the labour market where payrolls are currently tracking around 130,000 based on a wide range of employment indicators.
China: Drop in HSBC PMI suggests renewed weakness
The flash estimate for China‟s HSBC manufacturing PMI in November dropped markedly from 51.0 to 48.1. Importantly, the weakness appears to have been largely driven by weaker domestic demand, because the export order component in the survey held up quite well in the survey. Hence, there is no evidence that it is the European debt crisis and weaker exports that have finally started to weigh substantially on the Chinese economy. We should be careful to draw conclusion just on the manufacturing PMI. Nonetheless, it put into question our expectation that GDP growth will improve in the current quarter. The current level of the manufacturing PMI suggests GDP growth will remain in the 6-7% q/q AR range in Q4.
Monetary policy in China is already moving in a more growth-supportive direction in China. In the past week the Peoples Bank of China (PBoC) cut the reserve requirement for a number of smaller banks. The weak manufacturing PMI suggest that the policy response could become more forceful in the coming months. We expect the PBoC to start cutting the reserve requirement across the board for commercial banks in early January, but at this stage we maintain our view that the leading interest rate will not be cut. Although the weak HSBC manufacturing PMIs suggest downside on our forecast for GDP growth in Q4 11 and Q1 12 we maintain that GDP growth will improve in H2 12 supported by stronger credit growth and possibly a minor fiscal stimulus, if needed.
The debt crisis is changing character – from focusing on a few southern European countries to a general fear and investor flight from almost everything European. French spread widening has continued, as Fitch warned that France has limited room for manoeuvre without losing its AAA status and on Wednesday Germany experienced a failed auction. On Wednesday, the European Commission also presented its paper on Eurobonds – or stability bonds as they call them. This could be a solution to the debt crisis, but Merkel greeted the paper by saying that it was “exceptionally worrisome, inappropriate” that the Commission had proposed Eurobonds. On Thursday Merkel and Sarkozy said that they will go ahead with treaty changes and confirmed that they will do everything it takes to save the euro. At the same time Merkel continues to reject any idea that could do just that. On Thursday, Fitch downgraded Portugal to junk status emphasising that a deepening recession made it much more challenging to cut the budget deficit. The perception among analysts is now that only Eurobonds, or a significant increase in the ECB‟s buying of sovereign bonds, are the only two options remaining that can halt the escalation.
Activity indicators for the euro area published this week came out notably better than expected, but still indicate recession in the euro area. New orders look particularly bad signalling that the recession might not be as mild as hoped. Export orders are weakening too, as the debt crisis is beginning to drag trading partners down. The service sector PMI was more upbeat and shows particular resilience in France – although we do not believe that it is going to last and in any case it has been rather volatile. German Ifo expectations also increased and current conditions remained unchanged. Looking forward, we expect the Ifo to decline moderately. Our Ifo expectations model is pointing down now and the OECD leading indicator is much more downbeat with signals that we could see further drop in Ifo expectations.
US: Super Committee fails, Q4 tracking 2½-3% growth
US politicians once again demonstrated the lack of decision power as the so-called Super Committee failed to reach an agreement on finding USD1.2 trillion in savings over the next 10 years. With the two chambers in the Congress being split between a Democrat majority in the Senate and a Republicans majority in the House, the opposing views on how to tackle the debt challenge is blocking any real long-term plan. We‟ll likely have to get on the other side of the elections in November 2012 to see any real long-term plan materialise. Both parties seem to bet on having a majority in both chambers after the election in order to get it their way in dealing with the debt issue. Fortunately automatic spending cuts of USD1.2 trillion are due to kick in from 2013, so the lack of an agreement does not have any severe effect on the debt plans. The main effect is that it underpins the picture of lack of political decision power currently.
On the data front we saw slight disappointments this week after a period of mainly positive surprises out of the US. GDP for Q3 was revised down to 2.0% from 2.5%. However, this was mainly due to a downward revision of inventories, so it will likely mean the positive contribution from inventories in Q4 will be bigger instead. However, it doesn‟t raise our expectation for Q4 of 2½-3%, since other data was on the soft side. Core durable goods orders lost some momentum with core capital goods orders falling 1.8% m/m in October. And personal consumption was also slightly weaker at 0.1% m/m in October, but since September spending was revised higher, private consumption is still tracking around 2½% in Q4, a little higher than in Q3 where it increased 2.3%.
Initial jobless claims continue to trend lower pointing to some improvement in the labour market where payrolls are currently tracking around 130,000 based on a wide range of employment indicators.
China: Drop in HSBC PMI suggests renewed weakness
The flash estimate for China‟s HSBC manufacturing PMI in November dropped markedly from 51.0 to 48.1. Importantly, the weakness appears to have been largely driven by weaker domestic demand, because the export order component in the survey held up quite well in the survey. Hence, there is no evidence that it is the European debt crisis and weaker exports that have finally started to weigh substantially on the Chinese economy. We should be careful to draw conclusion just on the manufacturing PMI. Nonetheless, it put into question our expectation that GDP growth will improve in the current quarter. The current level of the manufacturing PMI suggests GDP growth will remain in the 6-7% q/q AR range in Q4.
Monetary policy in China is already moving in a more growth-supportive direction in China. In the past week the Peoples Bank of China (PBoC) cut the reserve requirement for a number of smaller banks. The weak manufacturing PMI suggest that the policy response could become more forceful in the coming months. We expect the PBoC to start cutting the reserve requirement across the board for commercial banks in early January, but at this stage we maintain our view that the leading interest rate will not be cut. Although the weak HSBC manufacturing PMIs suggest downside on our forecast for GDP growth in Q4 11 and Q1 12 we maintain that GDP growth will improve in H2 12 supported by stronger credit growth and possibly a minor fiscal stimulus, if needed.