Recap 12-9-11

North America:

  • 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
  1. 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.
  2. 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.
  3. 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.
  4. ESM introduction to be accelerated (to Jul ’12)
  5. 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.”
  6. 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.”
  7. It doesn’t look like the ESM will get a bank license (Germany’s resistance won out)
  8. 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.
  9. PSI on a case by case basis
  10. 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:
  1. CPI declined to 4.2% YoY vs 4.5% exp and 5.5% prev
  2. PPI declined to 2.7% vs 3.4% exp and 5.0% prev
  3. IP declined to 12.4% YoY vs 12.6% exp and 13.2% prev
  4. Retail Sales was stable at 17.3% YoY vs16.8% exp and 17.2% exp
  5. 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.


7 thoughts on “Recap 12-9-11

  1. It’s very clear that European area nations will slides into a recession. This combined with EM weakness (Ex: Recent Indian IP numbers) makes for a bad picture for global risk assets. However, good US data would indicate that we should be seeing positives for risk assets here in the US – in particular, analysis shows that HY & Equities are undervalued.

    Given the last point one would be inclined to go long US Risk-Assets, but as the markets have shown – weakness abroad will impact US markets no matter what the data says here. Given that there is a front-loaded sovereign-debt issuance calendar for 2012 + a high probably of bad Euro area economic numbers market-conditions will most likely remain negative both here and abroad into Q1 for 2012. After that I expect things to improve. HY in particular looks very attractive.

    **Note, Russia also causes worries

  2. I don’t share the enthusiasm for the euro and the ‘fiscal union’ that Germany now has orchestrated. The complexity of the EU ( it’s voting, it’s structure,the gap between EU political elite and the voters, it’s disregard of reality on the ground ) will surely make the road to this ‘fiscal union’ a long and frustratingly slow process.
    And if anything finally has been concluded: what’s the guarantee it actually is gonna work?

    The last EU summit has solved nothing and on top of that, team Merkozy face a lot of political head wind
    and re-election next year so whatabout new leaders come next summer?

    Paddy Ashdown ( LibDem , not in the Cabinet now ) actually put it quite well yday evening on the BBC:
    Cameron did a “Margaret Thatcher” and Sarkozy did a “Ch de Gaulle” but without the intellect and foresight
    of these historic figures.

    Euroland is truly in a hole with its Euro and can’t seem to dig itself out. So far, the pain to solve the crisis
    has been passed around and nobody is prepared to take it. Expect much more drama and true ‘pain’
    before this Euro crisis has been put to rest.

  3. I think there is broad agreement that EU will go through a recession. It appears that there is less agreement on whether the disorderly deleveraging will impact growth elsewhere.

    PPK, I think a lot of the points you’ve raised are valid, but I also think that the question isn’t whether the problems have been solved, but whether enough of a backstop has been put in place for an orderly deleveraging to occur. The solution to the problem of Unit Labor Cost differential within a currency union has to be long and drawn out. If it can be managed in a stable way via appropriate liquidity provisions and the avoidance of any systemic defaults, the markets can stabilize here, at levels that are already pricing in an extended recession.

  4. If the EU is going to have an orderly deleveraging (ie no inflation), who is going te be on the other side (who is going to do the leveraging?). Surely not the US; EMEs are too addicted to the export-growth model to rapidly switch over to domestic consumption…

    My guess is that government rates will stay lower for longer than a lot of other people think, while inflation destroys eats away at all that excess capital chasing a “safe” return.

    … And I deny that I am an MMTer.

  5. I think we agree we will have negative real money market rates and positive inflation, but I actually think that it will occur in conjunction with an orderly deleveraging. No one other than the ECB needs to be on the other side of deleveraging. Risk premium can simply stay elevated as EU banks simply stop increasing assets, stop paying dividends, and let their earnings increase equity. In the meantime the ECB provides essentially unlimited money via their refi operations as well as the ELA so that no EU banks go under. Case in point: no Greek bank has gone belly up yet!

  6. For clarity, I wasn’t talking about the money market having negative rates for an extended period, but government bond curves out to 10 years (and in enough countries, the long bond as well).

    As for European banks, will they actually be earning any money to bolster equity as their loan books sour over the course of the recession and the recovery and are forced to roll a wall of 2012 maturities at much, much higher rates? I can’t say I have done (or read) the analysis, but going into recessions with high leverage and upcoming debt maturities typically isn’t a very good recipe for bank equity. Agreed that with the ability to pledge loan books as collateral at NCBs, there is no chance they will go bust, but there are going to be a ton of Japanese-style zombie banks out there.

  7. I think that’s right. And when you add the fact that much of the EU economy’s credit intermediation goes through banks rather than through corporate bond issuance, we have a recipe for a very prolonged recession.

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