- U Michigan Confidence jumped to 67.7 in Dec vs 65.8 exp and 64.1 prev
- EU Council Statement on new fiscal compact, agreed to by 23 of 27 EU leaders. UK is one of the holdouts
- Countries will keep fiscal deficits to <0.50% of GDP. Such a rule will also be introduced in Member States’ national legal systems at constitutional or equivalent level. The rule will contain an automatic correction mechanism that shall be triggered in the event of deviation.
- As soon as a member state is recognized to be in breach of the 3% ceiling by the commission, automatic consequences will be applied unless a qualified majority of euro area member states are opposed.
- The EFSF will be actively deployed. As noted yesterday at the ECB press conference, the ECB will act as an agent for the EFSF in its market operations.
- ESM introduction to be accelerated (to Jul ’12)
- The ESM could be raised. “We will reassess the adequacy of the overall ceiling of the EFSF/ESM of EUR 500 billion (USD 670 billion) in March 2012.”
- ESM and EFSF could wind up operating simultaneously for a period of time. “The EFSF will remain active in financing programs that have started until mid-2013.”
- It doesn’t look like the ESM will get a bank license (Germany’s resistance won out)
- Europe will contribute EU200B of additional resources to the IMF. Note that while Draghi may have expressed opposition to these types of loans, the ECB can only stop national central banks from taking action with a 2/3 majority.
- PSI on a case by case basis
- Draghi approves of progress – "We came to conclusions that will have to be fleshed out in coming days. It’s going to be a good basis for a fiscal compact for the euro area." – WSJ
Moody’s downgraded the French banks BNP, SocGen, and Agricole today.
UK PPI Output Core Declined to 3.2% YoY vs 3.3% exp and 3.4% prev
Norway CPI-ATE declined to 1% YoY vs 1.2% exp and prev
- Chinese Data for Nov:
- CPI declined to 4.2% YoY vs 4.5% exp and 5.5% prev
- PPI declined to 2.7% vs 3.4% exp and 5.0% prev
- IP declined to 12.4% YoY vs 12.6% exp and 13.2% prev
- Retail Sales was stable at 17.3% YoY vs16.8% exp and 17.2% exp
- Fixed Assets Investment declined to 24.5% vs 24.8% exp and 24.9% prev
The EU council statement will result in a sustained recession. It is probably best described in the following chart, where
- the red line is the EU unemployment rate, inverted
- white line is German budget deficit
- orange is French budget deficit
- yellow is Italy budget deficit
- green is Spanish budget deficit
The current unemployment rate is 10.3% and rising, and looks almost certain to touch 10.5%. The last time this happened in 1995, the average of the 4 EU budget deficits was 7.4%, followed by an improvement in 5% in 1996 as growth improved. It was at 6.3% in 2010 and they now want to limit the deficit to 3%. The fiscal tightening as the economy is going into a recession looks likely to have a very damaging impact on growth. However, it is bullish for EURUSD.
However, on the positive side I would argue that the statement broadly removes the worries of an actual default by a core EU country, for now. The EU has committed to austerity and price stability over the US route of inflating away debts. While deleveraging pressures will continue, the statement and commitments by the EU suggests that macro investors can have more confidence in the integrity of the EU. There is also the possibility that the period of maximum deleveraging intensity has passed given that we are near year end. Both items should be broadly positive for non-EUR risk assets, IMO.