Econ Brothers' Morning Macro 12/6/12

Slow night…most risk higher on an apparent phone call between Boehner and Obama, but not much has changed on the fiscal cliff front. We did get much better Germany factory order data (Germany Oct Factory orders +3.9% m/m vs. consensus +1.0% and prior revised to (2.4%) from (3.3%).  Export sales soared 6.7 percent in October, driven by an 8.5 percent increase in orders from outside the euro area, today’s report shows. Orders from the 17-nation currency bloc rose 3.5 percent and domestic orders were up 0.4 percent.) And that seems to be helping the Euro/DAX. Asia taking a bit of a breather post yesterday move as Shanghai down a touch, and gold/silver/copper (reflation) are all down a touch (yet the USD is weak across the board). It’s another non correlated day in the macro backdrop and I expect that will continue until we get some 1) fiscal cliff clarity and 2) some idea of what the actual austerity will feel like (so as we actually go through it next yr…how bad it is for the US will impact the globe) next yr.

German factory orders: Good start to Q4


German factory orders rebounded strongly in October by 3.9% m/m, much better than expected (consensus +   1.0%), pushing the orders level 2% above its Q3 average. The September figure was slightly revised up from -3.3% m/m to -2.4% m/m. The improvement in core manufacturing orders (+0.8% m/m), which exclude volatile large transportation equipment orders, was less impressive; the October level remains about 1% below the Q3 average.


Overseas orders jumped by 8.5% m/m, and overseas investment goods and core orders are close to record levels, indicating that the global investment cycle is improving. Orders from other euro area member states also improved somewhat (+3.5% m/m), yet it remains to be seen if this finally marks the end of the negative trend. Other euro area member states primarily ordered more immediate, investment and non-durable consumer goods while durable consumer goods orders still fell sharply again.


Domestic demand remained subdued (+0.4% m/m), but domestic investment goods orders (+0.9%) fared somewhat better than the rest.  All in, October orders made a strong start to Q4 but expect industrial activity to recover only slowly from currently subdued levels

Euro area Q3 GDP confirmed at -0.1% q/q – negative stock-building the main culprit for Q3 GDP fall

Eurostat has made no major revision in its second estimate of euro area Q3 GDP, confirming its preliminary estimate of -0.1% q/q. At 3 decimal places, it was actually revised up very slightly from -0.054% q/q to -0.052% q/q. Today’s outturn confirms that euro area GDP actually fell every single quarter since Q4 2011 (-0.4% q/q, -0.033% q/q in Q1 12, -0.2% q/q in Q2 and -0.1% q/q in Q3). Since the cyclical peak, euro area GDP dropped by 0.6%, going back to its Q4 10/Q1 11 levels. From the expenditure component breakdown, we note that the domestic demand contribution to GDP actually improved from -0.6pp in Q2 to -0.2pp in Q3, although remaining in negative territory for a sixth consecutive quarter. In Q3, inventories made a particularly negative contribution (-0.2pp, largest since the beginning of the year), boding ill for future prospects.

UK MPC holds policy as expected


The Bank of England’s Monetary Policy Committee voted to keep policy unchanged today, with Bank Rate held at 0.5% and the stock of asset purchases fixed at £375bn. This was in line with expectations. As is usual in the case of a no-change decision, no material statement was released alongside the announcement.


Although economic activity remains weak, inflation has been surprisingly strong. CPI inflation rose to 2.7% in October, and the MPC now expect it to stay above target until the second half of 2014. This stubborn persistence in inflation has made the MPC increasingly concerned that it has underestimated underlying inflationary pressures, and the committee has become increasingly wary of adding more stimulus. In addition, the committee seems hopeful that the FLS will improve credit flows, but it will be some months yet before the effectiveness of the scheme can be gauged with any confidence.

UK trade deficit widens more than expected


The goods trade widened more than expected in October, as a result of rising imports and falling exports. The deficit widened to £9.5bn (consensus: £8.7bn) from £8.4bn previously. The oil deficit narrowed to £1.1bn (from £1.4bn), reflecting a decline in oil prices during the second half of the month. However, we would point out that the oil deficit remains quite large by historical standards owing to a declining trend in the UK’s supply capacity.


Exports to both EU and non-EU countries fell. Exports to the euro area declined by 1.1% 3m/3m in value terms and exports to non-EU countries fell by 3.5%.

Given the ongoing uncertainty about of the euro area economies, we expect this to remain a source of weakness for the UK and we could well see exports to these countries remain very weak in the coming months. However, what is more concerning is the persistent weakness in exports to countries outside of the EU, as it suggests that hopes that stronger growth outside the EU would offset the effects of weakness in the euro area may be misplaced. 

UK house prices rise on the month, but underlying trend remains soft


House prices rose strongly in November, according to the Halifax survey. House prices increased by 1.0% m/m, bringing the average price up to £161k. The less volatile 3m/3m growth rate, however, was -0.7%, reporting the sixth consecutive decline and painting a less optimistic picture of the underlying trend of the series. According to Halifax, there were some signs that the Bank of England Funding for Lending Scheme was lowering mortgage rates and boosting the number of approvals. The Nationwide data for the same month were less upbeat and reported house prices were flat in November. 

The U.S. labor releases this morning were better than expected. 

 Unemployment claims and continuing claims fell more than expected while Challenger tally of layoffs (seasonally adjusted) dropped and the Challenger tally of hiring notices (seasonally adjusted) rose.  The labor market is continuing to heal.   For the next three weeks or so, economic data will be weighed down as the Northeast was devastated by the Hurricane Sandy. However, starting with the economic/ financial releases concerning December (to be released in January and February) a robust rebound is expected.  As a result, it will be hard to gauge overall economic growth for the next few months.

  • Unemployment claims fell -25,000 for the week ending December 1 to 370,000.  That puts the four-week moving average at 408,000.  It will probably fall sharply next week.
  • Hurricane Sandy has clearly whipsawed claims.  They peaked at 451,000 for the week ending November 10.   
  • Continuing claims for the week ending November 24 fell moderately to 3.205 million, not significantly different than before the Hurricane.
  • The Department of Labor noted no special factors beyond the waning influence of Hurricane Sandy.
  • In another report, the Challenger tally of layoff notices in November rose not seasonally adjusted.   This tally included the shutting down of operations at Hostess Brands.  However, seasonally adjusted, the tally actually fell.  The challenger tally of hiring notices in November rose seasonally adjusted.


Global business confidence improves, helped by services

Julian Callow


Bottom line: After taking into account today's stronger-than-expected service sector confidence reports, particularly from the US, Brazil, Japan and Australia, our global GDP indicator, based primarily on business confidence data, is showing a further uptick, although it remains below the pace of growth which is being forecast in aggregate within our country-based GDP projections for Q4 and Q1. Overall, it appears that the improvement in financial market sentiment has been resulting in a stronger tone to the service sector, despite the subdued level of manufacturing confidence.


Euro area final PMIs: A little bit more than a monthly rebound, but not much more

Apolline Menut & Francois Cabau


Euro area final composite output PMI was markedly revised up from 45.8 to 46.5, increasing from 45.7 in October. The upward revision only came from the services sector as its headline index was revised up 1.0 points to 46.7, increasing by 0.7 points from October. Meanwhile, the unrevised manufacturing sector output index rose from 45.0 in October to 46.2 in November.  

UK Media 

Fitch has said the government's failure to meet its debt target 'weakens the credibility' of the UK's triple-A rating. The agency said it now expects general government gross debt to peak at 97% of GDP, 'approaching the upper limit of the level consistent with the UK retaining its AAA status', and that it would formally review the rating after the March 2013 Budget. Fitch put the UK on negative outlook earlier this year. (BBC)


Around 400,000 middle-class professionals are set to pay more income tax as a result of changes in the Autumn Statement. More people will qualify for the 40% rate because the chancellor has raised the earnings threshold by just 1%, well below rates of wage inflation. The move is expected to raise £1bn a year for the Treasury. (Telegraph)


North Sea oil and gas production could confound expectations and rise significantly over the next few years, according to a study by the University of Aberdeen. Oil production fell more than 17% last year and the Department of Energy and Climate Change forecasts a continued decline, albeit at a slower rate, but this new report claims the development of new fields could provide a substantial near-term boost. However, in the longer term the study forecast that total oil and gas production would fall short of the official forecasts. (Telegraph)

EU Media Review


France: Gas prices; Unemployment


Gas prices are set to increase by 2-3% on the 1st of January, according to exchanges between the regulator and Gaz de France. While the automatic formula points toward a +0.8% increase, the government has to catch up with cancelled past increases in order to keep production prices and selling prices aligned. That said, the government can still decide to limit, delay or even cancel any increase. Negotiations will continue probably until year end. (Le Figaro)


Unemployment reached 9.9% (mainland) in the third quarter, according to the national statistical institute INSEE. Unemployment among young workers increased by 1.4pp and reached 24.2%, the highest level ever. Unemployment rate for the second quarter has been revised up 0.1pp. (Le Figaro)


Italy: Berlusconi's statement, Regional elections


In a statement published yesterday, Silvio Berlusconi touched on various subjects, but he did not clarify whether he will be a candidate in the next general election. (IlSole24Ore)


The Cabinet of Ministries is expected to reveal today the official day of regional elections in Lombardia, Lazio and Molise. (Il Corriere della Sera)


Belgium: Q3 GDP unrevised at 0.0% q/q


Belgium Q3 “flash” GDP was confirmed yesterday at 0.0% q/q by the Belgian National Bank in its second estimate. Expenditure breakdown revealed that final domestic demand remained unchanged between July and September, notably featuring a private consumption increase (+0.1% q/q) for the first time since Q4 2010. Net trade added 0.2pp exactly offset by another quarter of destocking (-0.2pp) (Bloomberg)


Ireland: Bank guarantee to be extended, Budget 2013


The Government is likely to extend the bank guarantee to the end of June 2013 for the last time, according to ratings agency Fitch, a move that is expected will be approved by the European Commission. However, Fitch warned that the expiry of the State support could heighten the risk of “deposit flight”, although it acknowledged that the bank recapitalizations and “deleveraging” of excess loans have lessened the chance of this happening.  (Irish Times)


Irish consumers are expected to be hit by a range of budget measures including a property tax, reduced child benefit, extended PRSI and cuts in the entitlements for the elderly. The Budget announced cuts in spending of EUR300m less than initially planned in order to minimize the impact on health and social welfare. The shortfall in the overall adjustment was made up in extra taxation. Minister for Finance Michael Noonan hoped this would be the last austerity budget, and he predicted the adjustments in 2014 and 2015 would be much smaller. He also said this was the last December budget and he hoped to publish the 2014 budget next October. (Irish Times)


Greece: Rating cut


S&P reduced Greece’s rating to selective default (SD) on debt buyback. The SD designation “includes the completion of a distressed exchange offer, whereby one or more financial obligation is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par,” according to S&P’s website. The rating agency also said that it will reconsider after the buyback whether or not sustainability has been improved and could upgrade Greece to CCC again. (Bloomberg)


Slovenia: EU welcomed pension reform passage, NLB further losses expected


The passage of pension reform by the Slovenian parliament is a “welcome signal” and is in line with the recommendations the countries received this year in the area of public finances and structural reforms, the European Commission said on Wednesday. The government-proposed reform was passed by the National Assembly on Tuesday, with 76 votes in favor and none against. The European Commission also stressed that “the key point is now implementation”. (Slovenia Times)


Slovenia’s largest and state-owned bank, Nova Ljubljanska Banka (NL said that further losses are expected in 2013, as the number of bad loans (20% of the bank’s total assets) continues to rise. (Reuters)


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