Econ Brothers' Morning Macro 12/5/12

OVERNIGHT NEWS/DATA: A bit more action overnight as Chinese stocks had a monster move higher (+287bp…rest of Asia very strong) and we got a bunch of PMI from around the world. Europe was better than expected, but still in contraction territory for 10th month. And India/UK came in lower than expected …we also got much worse retail sales for Oct (Eurozone Oct Retail Sales (3.6%) y/y vs. consensus (0.8%) and prior (0.8%)) and the auctions for Spain not as great as they have been (Spain was at recent lows on yields as they have collapsed of late…so makes some sense that auction didn’t go as well.)…2yr Euro basis swap is much tighter this AM, so that measure of risk is very positive and probably speaks to overall better backdrop with the strong Asia (good for Europe/Germany), yields in Europe near the lows and general more pos policy outlook given recent Merkel comments on haircuts and Greece in general.  (ISI)

  • DATA
  • AUSTRALIA Q3 GDP Q/Q: 0.5% V 0.6%E (3-quarter low); Y/Y: 3.1% V 3.1%E (3-quarter low)
  • AUSTRALIA NOV AIG PERFORMANCE OF SERVICE INDEX: 47.1 V 42.8 PRIOR (5-month high; 10th straight contraction)
  • NEW ZEALAND Q3 VALUE OF ALL BUILDINGS: 9.6% V 5.5%E (biggest gain in 10 years)
  • CHINA NOV HSBC SERVICES PMI: 52.1 V 53.5 PRIOR (3-month low)
  • Finland Q3 GDP Q/Q: -0.1% v +0.3%e; Y/Y: -1.2% v -0.8%e
  • Italy Nov PMI Services: 44.6 v 46.0e (18th straight month of contraction)
  • France Nov Final PMI Services: 45.8 v 46.1e (3-month high)
  • Germany Nov Final PMI Services: 49.7 v 48.0e (7th straight contraction)
  • Euro Zone Nov Final PMI Services: 46.7 v 45.7e; PMI Composite: 46.5 v 45.8e
  • Iceland Nov Preliminary Trade Balance (ISK): 12.3B v 15.2B prior
  • Euro Zone Oct Retail Sales M/M: % v -0.8%e; Y/Y: % v -0.2%e

“Assuming no change in December, the euro area composite PMI would point to a GDP contraction of 0.5% QoQ in Q4 2012, slightly weaker than our projections.”

The PMIs present a downside risk to Q4 growth for France and above all Italy. A notable caveat is that in the past two quarters the PMIs underestimated GDP growth for these countries and the euro area as a whole. Indeed the national surveys point to a smaller GDP contraction in Q4 2012. That said, the European Commission’s projections for the current quarter appear too optimistic with the exception of those for Spain (Deutsche Bank).

Obama stands by demand for higher tax rates on wealthy (That’s  high incomes for the financially literate -- Big surprise he still confuses stock and flow)
President Barack Obama said in an interview with Bloomberg television that there will be no deal in averting the "fiscal cliff" that doesn't include an increase in tax rates for the wealthiest Americans. "We're going to have to see the rates on the top 2% go up, and we're not going to be able to get a deal without it," Obama said. He seemed more open to cuts, but tax increases on top 2% are not negotiable. It seems to be that defending that position from republicans is not going to be defensible (especially if Obama is willing to move on entitlements). That being said, it’s still seems like we are very far from an actual deal and that we the potential scenarios for early next yr are too much for many to get there head around (what a short term deal would look like, could we go off the cliff just a bit, how long will they negotiate for if we go off the cliff a bit etc.,).   What Obama said that was encouraging (from getting a deal done point of view)… “I don’t expect Republicans to agree to any plan where they’re just betting on the come that entitlement reform will happen,” Obama said. 

UK Shop price inflation unchanged but food prices accelerate


Overall shop price inflation was unchanged at 1.5% y/y in November, according to the latest BRC-Nielsen Shop Price Index. However, food price inflation picked up to 4.6% y/y, from 4.0% in October, offset by a decline in non-food inflation to -0.3% y/y from 0.0%. The BRC reported that higher food commodity prices were feeding through to prices of fresh food, including meat, fish and vegetables. The BRC also noted that retailers were likely to see margins squeezed over the Christmas period, including by promotional activities that lower effective prices for consumers but not picked up by either the BRC shop price inflation measure or official inflation data.

UK services activity slows as economy loses momentum


The November services PMI was weaker than expected. The business activity index edged down to 50.2 (consensus 51.0) from 50.6. Although the index fell short of indicating a contraction, activity remained well below its historical average and was at its weakest for nearly two years. This disappointing reading follows a downward surprise from the construction survey and a sub-50 reading for the manufacturing PMI earlier this week.


The forward-looking measures indicated a worsening in near-term prospects. The business expectations index fell to an 11-month low of 64.0 (from 65.3), and the new orders index fell sharply to 49.6 (from 52.9), its worst reading in almost two years. The weak performance was driven mainly by concern over the underlying strength of the economy, although anecdotal evidence suggested poor weather could have exacerbated the meager reading for the new orders index. The employment index stabilized at 50.3 (from 49.2) after two months of falling payroll numbers.

Finland: GDP contracts by 0.1% in Q3 12

According to preliminary data of Statistics Finland, in Q3 2012 the volume of Finland’s GDP decreased by 0.1% q/q, following the unrevised 1.1% contraction recorded in Q2, Finland entered into recession. In the third quarter, the volume of exports grew by 2.4 % q/q but contracted by 1.8 % y/y. Imports decreased by 3.7 % q/q and by 4.1% y/y. The volume of private consumption grew by 0.8% q/q (0.6% y/y) whereas investments dropped by 1.1% q/q (4.4% y/y).

Productivity at trend, labor costs contained in the US

Productivity (measured by output per hour in the non-farm business sector) was revised up to 2.9% q/q (saar) from 1.9% in Q3, close to our forecast and the consensus (both 2.8%). On a y/y basis, it rose 1.7%, in line with what we judge to be the likely trend rate, reflecting solid output growth (3.5% y/y) and a modest gain in employee hours (1.8%). The flip-side of the upward revision was softer unit labor cost growth, revised down to an annualized -1.9% q/q from -0.1%. The surprise relative to our -1.0% forecast reflected softer compensation growth. On a y/y basis, unit labor costs rose 0.1%, reflecting the balance of similar growth in productivity (1.7%) and compensation per hour (1.8%). A trend rate of productivity growth around 1.7% is consistent with our view that potential GDP growth will be about 2% in the coming years, with a continued boost from population growth likely to be offset by lower labor force participation and higher structural unemployment compared with the pre-recession period.

ADP employment report shows moderate payroll growth in November despite an estimated 86k reduction in payrolls due to Hurricane Sandy


ADP reported that private payrolls rose by 118k in November, roughly in line with the consensus estimate of 125k and below the revised October print of 157k (originally 158k).  Hurricane Sandy had a large impact on this report, however; Moody’s Analytics estimates that payroll employment was 86k lower than it would have been absent the storm.  This would have put payroll growth at 204k for November, which would have been the strongest print since February, and suggests that the underlying trend in private sector job growth was firm despite concerns about the fiscal cliff.  Virtually all of the gains were seen in the service sector, which saw payrolls rise by 114k, and there were encouraging increases in the construction (23k), manufacturing (16k), and professional/business (16k) industries. 

At this point in the business cycle, both ADP employment index and the jobs report probably underestimate private job growth.  The birth/death adjustment influences both and does not capture the upturn in new business formation.  

  • ADP payroll employment index rose 118,000 in November and October's gain was revised down to 157,000.
  • Recently, this index has generally underestimated private job growth.
  • The gains were broad based across the size of business.  Mfg  and construction posted gains of 16,000 and 23,000 respectively.
  • We expect payroll employment to advance 70k to 90k in November.

EU Media Review


Germany: Chancellor Merkel confirmed as CDU Party Leader with 98% of Votes


Angela Merkel was re-elected as CDU leader with 97.9 percent of the votes at the party’s convention in Hannover (3-5 December), significantly better than the 90.4 percent of votes she received at the previous election for CDU leadership two years ago. Chancellor Merkel has long been Germany’s most popular politician, according to surveys, and her party CDU and its Bavarian CSU sister party are with 37 percent support the strongest political party in Germany, according to the latest polls, and by about 10 percentage points ahead of the opposition Social Democrats (SPD). Yet, the CDU/CSU is still in need of a strong coalition partner as the current coalition government CDU/CSU/FDP would not muster a majority, due to the low support for the FDP which, according to current polls, would fall below the Bundestag’s 5% minimum threshold and drop out of parliament. (Der Spiegel)


France: Supplementary budget


The government intends to amend some of the current budget under discussion at the parliament in order to include higher tax rates on gains from secondary house sales starting in 2014. For gains higher than EUR100,000 the tax rate would increase from 19% to 22% and to 24% for gains bigger than EUR150,000. The government hopes to raise EUR150mn per year with this measure. (Les Echos)


Ireland: High earners targeted by 2013 Budget


Pensioners with high incomes will be targeted in today’s budget with an estimated EUR500m in new taxes and cuts coming from this group. One of the measures that will be announced will be a 3pp increase in the universal social charge to 7% for those over 70 with incomes of EUR60k or more. A new cap of EUR60k on the amount of annual tax relief available for pension contributions is expected to generate savings of EUR200m. An extension of PRSI to non-earned income such as rental income, share and dividend income is also expected. This includes the private income of hospital consultants which is currently exempt from PRSI. “All of these measures are particularly targeted at high-income earners and will make this a progressive budget,” according to a government source. (Irish Times)


Slovakia: Tax rise and budget deficit target


Slovak lawmakers approved tax increases for individuals and companies, the government relying more on revenue-side measures rather than spending cuts to achieve its deficit target. Corporate tax will rise from 19% to 23% and income tax will increase from 19% to 25% for individuals earning more than 2,867 euros per month. (Bloomberg)


Slovenia: Pension changes extending working time


Slovenian lawmakers approved changes to the pension system, extending working time to 40 years in order to be eligible for pension benefits. (Bloomberg)

UK Media   

Chancellor Osborne will extend austerity deep into the next parliament as he presents a bleak Autumn Statement against a backdrop of weaker growth and a larger deficit. Richer households and the unemployed will be among the groups having to take more of the fiscal pain, although motorists are expected to be spared the planned 3p a liter fuel duty rise in January. Yesterday, Mr. Osborne announced £5bn of capital funding, but it will mean more cuts in “unprotected” departments - only health and education are immune. (FT)


The Chancellor will raise the tax rate on banks’ balance sheets again today. The bank levy was designed to raise a target amount every year, and as banks’ balance sheets shrink the rate needs to increase in order to achieve that. (Times)


The Chancellor will use his Autumn Statement to open a review of the methods companies use to assess pension schemes following complaints that low interest rates are artificially pushing final salary schemes into deeper deficit. A change in the way the Pension Regulator (PR) calculates shortfalls might allow companies to reduce contributions, although the PR has said a different approach would “risk simply picking the answer you want and ignoring the reality of the situation”. (FT)


Prime Minister Cameron is ready to give voters the chance of rejecting Britain’s membership of the EU in a landmark referendum. He is considering asking the public to support a looser relationship with Brussels the he hopes to negotiate over the coming years, but is ready to give the country the chance to say no to such a deal, a result that would effectively be seen as a vote to quit the EU. (Times)


The government has been instructed by the statistics watchdog to stop saying that NHS spending has increased. The UK Statistics Authority said the Health Secretary should “clarify” claims that expenditure on the NHS had risen in real term every year under the coalition because Treasury data suggested it was lower in 2011-12 than in 2009-10. (Telegraph)


The average household spent less per week last year than in any of the previous 14 years after adjusting for inflation, underlining the effects of the economic crisis on living standards. (FT)


The Treasury Committee is to carry out an inquiry into Britain’s tax system, examining its competitiveness and whether it is vulnerable to tax avoidance. The inquiry will be broader than the Public Accounts Committee examination of tax paid by multinationals, covering the entire “purpose of tax policy”. (FT)


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