The waiting game - Economics weekly


The waiting game - Economics weekly

James Carville, advisor to President Clinton, once famously quipped that if reincarnated, he would like to be the bond market, because it intimidates everybody.

Economic Analysis

08 October 2012

 

While the bond market remains near-omnipotent, central banks, especially the European Central Bank (ECB) are becoming stronger Davids to the bond market’s Goliath. Simply by announcing its new bond-buying programme (Outright Monetary Transactions) the ECB has lowered borrowing costs for the Eurozone’s periphery. ‘Ask, and it shall be given to you’, states the ECB. Now governments need to sign-up. But there are conditions attached, thus making countries like Spain procrastinate. The waiting game cannot last forever though. With private sector activity weak, it’s a question of when Spain requests help, not if.

UK private sector activity bucks the global trend

The UK readings for both the manufacturing and services Purchasing Managers’ Indices (PMI) fell in September, bucking the global trend that saw rises in both sectors. With a reading of 52.2 in services and 48.4 in manufacturing it’s safe to say the UK is doing better than the Eurozone and, more generally, the economy is almost certain to have emerged from recession in Q3. But it’s too early to tell if the UK has turned a corner.   

Downward drift in UK house prices continues

The Nationwide index showed UK house prices fell by 0.4% in Q3 compared with the previous quarter. Prices in Q3 were 10.4% below where they were at the start of 2008. According to Halifax, the average price of a house is now at £159.5k – the price they first reached in summer 2004. On a y/y basis prices fell 1.4% y/y in September and have now been declining since March. With mortgage lending still very weak and an uncertain outlook for the labour market, further slips in house prices are likely.    

Bank of England holds steady

The Monetary Policy Committee (MPC) as expected did not adjust the size of its asset-purchase programme (QE) or the base rate. It appears the MPC wants to assess the Funding for Lending scheme before deciding whether further QE is required or even if rates need to be cut. Yet judging by a couple of recent speeches by MPC members, discussions taking place behind the scenes will be lively. MPC member Spencer Dale has stressed the risks of untested monetary policy in an uncertain world, while Ben Broadbent suggests policy should aim to fix the credit supply. The minutes of the meeting, released in a few weeks, should provide some insight on whether November will see more QE.

No surprises from Frankfurt

The European Central Bank (ECB) left interest rates unchanged at 0.75% at its October meeting. But President Draghi had plenty to say. In addition to highlighting worries over the deteriorating economic outlook, he reminded governments that the new bond-buying programme, the Outright Monetary Transaction (OMT), is open for business. Perhaps oddly, while Spain and Italy can expect help if they apply for a bailout, Greece, Portugal and Ireland cannot expect further support, even though Portugal and Ireland are making the first steps back toward market funding. The ECB is willing to help but governments need to take the first step and the offer is for new customers only. 

The Eurozone sovereign crisis continues to weigh on private sector activity

President’s Draghi’s concerns around the economic outlook are well-founded. The composite PMI for the Eurozone, covering manufacturing and services, dropped from 46.3 in August to 46.1 in September, the worst reading since Q2 2009. The economic slowdown in the periphery remains severe but more worrying is the heavily depressed readings in both manufacturing and services for France – a country thought to be part of the core. Meanwhile, Eurozone retail sales continue to fall on a y/y basis with a 1.3% drop in August. This is unsurprising given unemployment remained at a euro-era high of 11.4% in the same month. It’s almost certain the Eurozone entered a technical recession in Q3. What’s uncertain is when it will come out of it.

US data improves

September’s job market numbers gave further reason to believe the US recovery is entrenching, even if it remains weak by the standards of the past. The unemployment rate fell to 7.8%, its lowest level in almost four years as one survey showed more than 870,000 more people moved into work. On a different measure, employers said they had an extra 114,000 employees on the books (200,000 including revisions to previous months). The discrepancy arises because surveys have a margin of error around their main estimate - just think of opinion polls. However, the key message is that the US job market is healing slowly. And there was more good news. September’s  US manufacturing PMI equivalent rose to a four-month high of 51.5 and the services reading reached to a six-month high, suggesting a bit more momentum in the US private sector. Please see our attached world economy barometer (PDF 70KB) for a closer look at the past week’s PMI readings.

 

Disclaimer

This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice. The classification of this document is PUBLIC. © Copyright 2013 The Royal Bank of Scotland plc. All rights reserved.

 

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