When austerity meets growth

- "In Toronto, G-20 leaders agreed that the pace at which fiscal stimulus is phased out and reversed into fiscal consolidation should vary from country to country, depending on the relative fragility of the debt and growth outlook. This pragmatic approach suggests that we should not expect any meaningful change to the fiscal stance for 2011 announced by G-20 countries before the meeting in Toronto."
- "On the basis of the fiscal measures so far announced by eurozone countries, we estimate the size of the budgetary consolidation that will take place at the area-wide level. Overall, we expect that the fiscal stance will remain broadly neutral this year and turn restrictive in 2011,
but the drag on growth should be manageable."
- "Our analysis suggests that fears of an austerity-driven double dip recession are exaggerated. Even taking into account the margin of uncertainty surrounding the estimate of the fiscal multiplier, we think that the impact of budgetary consolidation on GDP growth should be totally offset by the euro depreciation."
- "We emphasize that policy-makers should focus not only on the overall size of the budgetary correction, but also on the quality of the adjustment. The European Commission suggests that there’s no inconsistency between budgetary consolidation and growth, provided
that fiscal austerity is designed properly and the relevant time span exceeds one year."
Unicredit Economics Special 20100701

Readings

Those low interest rate U-Zirpers at the BIS - FT Alphaville
Crazy Treasury Bulls Get It Right - Barrons
The three biggest lies about the economy - Market Watch
Deflation the Primary Risk Ahead - Bond Squawk
Fed official warns of asset risk - Financial Times
Warning signals of a double-dip recession flash brightly across the world - Telegraph
Governments Move to Cut Spending, in 1930s Echo - New York Times
Europe's not the problem - Asia Times
Down and Dirty: $3 Billion in 'Dirt Bonds' Are in Default - Florida Trend
Cleveland Fed: It's not looking good - Macro and Other Market Musings
Getting Capitalists to Act Like Capitalists - Calculated Exuberance
Spanish risk: let’s get regional, redux - FT Alphaville
Goldman’s collateral demands and the financial crisis - Reuters
Some thoughts from the Barclays Capital Inflation Conference - Bond Vigilantes
Keynes vs. Alesina. Alesina Who? - Businessweek
Is it 1937 again? - Marginal Revolution
Krugman’s missing link - Anticap
Mind the gap - Anticap
A new global reserve? - Economist
The Icelandic Post-crisis Miracle - New York Times
Fed Made Taxpayers Unwitting Junk-Bond Buyers - Bloomberg
Jobless recoveries - Econbrowser
Global banks face $5.8 trillion rollover - Sydney Morning Herald

LatAm: Positive activity indicators offset the impact on markets of an adverse global environment

- "Activity indicators in Argentina, Chile and Mexico surprise positively. Total credit growth in Colombia kept growing in May (4% y/y), boosted by the mortgage portfolio (20.6% y/y). In Peru, public expenditure grew above expectations in May, although it slowed versus the previous month, despite the Government’s announcement regarding moderation of public expenditure."
- "Differing Latam exchange rate dynamics due to domestic factors."
- "In Brazil and Peru domestic factors continue to support lower depreciation, while in Chile the link to the price of copper is expected to generate pressures. Colombia’s relative exchange rate strength was boosted following Moody’s announcement."
BBVA Latin Weekly Observatory 20100702

Economic recovery on track, but uncertainty increases

- "World environment: challenges ahead for a sustained recovery."
- "Domestic demand in the eurozone was subdued. Strong exports supported for the strength of the industrial sector.""
- "The first steps of the recovery are still modest."
- "The sovereign bond crisis, the lack of restructuring in the financial sector and the end of temporary stimulus will put a break on the recovery of domestic demand, but world trade growth and euro depreciation will partly compensate for it."
- "The outlook for 2010 and 2011 presents a very slow recovery, and heterogeneous across member states, while uncertainties increase."
- "Monetary policy to remain adequately accommodative until at least the end of 2011."
- "The fiscal consolidation challenge ahead is important, but the risk of a large negative effect on growth is small."
BBVA Europe Economic Outlook June2010

Italy Monitor: A good start of the year, what now?

- "The breakdown of Italy’s GDP for 1Q 2010 revealed that net exports provided the largest contribution, while a positive note came from capex. The inventory cycle seems to have run much of its course, while government consumption has entered a declining trend."
- "Despite some encouraging signs, labor market remains in a very early phase of recovery. In 1Q 2010, employment increased slightly, and the rise in unemployment rate was relatively contained. Still, labor input in terms of full time workers keeps falling."
- "Bank of Italy’s data show a stabilization of bank lending to households and non-financial corporations in April. The yearly rate of growth confirmed a moderate increase of 1.0%, declining only slightly with respect to March."
- "In May, the upward trend in inflation came to a halt, following a drop in the transport component, which in turn was prompted by a sharp plunge in air tariffs. Among other core components, after a year in positive territory, the yoy change in communication prices turned negative again."
- "In the Focus section we show that evidence of a co-movement between public and private wages seems well-entrenched. Thus, following the measures included in the budgetary correction, some spillover seems likely in term of wage moderation from the public to the private sector."
Unicredit Italy Monitor June2010

Weekly Focus: Fear of a major slowdown is mounting

- Market Movers ahead
• ECB meeting on Thursday – questions are expected to centre around additional liquidity measures and the ECB’s asset purchases.
• Developments in Euroland bond markets and news out of southern Europe.
• US non-manufacturing ISM – will it hold up better than its manufacturing sibling?
• Monetary policy meeting at the Bank of England is not expected to bring any changes.
• Swedish industrial data and the government’s net borrowing needs.
• Norwegian CPI.
Global Update
• Global PMI’s have fallen – fundamentals suggest a slowdown, but the European debt crisis has likely accelerated the decline.
• The Riksbank hiked rates by 25bp, as expected, and the repo path was revised slightly higher in 2010 and 2011, but lower in 2012-13.
• The expiry of the one-year LTRO has brought the duration of Euroland money market liquidity lower, which has put upward pressure on short-term rates.
• The G-20 summit highlighted the change in policy focus from coordinated global growth support to a more diverse agenda. In Europe, focus is on public finances and in Asia attention has turned to inflation fighting.
Focus
• The combination of general pressure on the euro and the SNB ceasing to intervene in the FX market has opened the door to the downside in EUR/CHF.
• We see a high probability of further support for the Swiss franc in the coming months. However, if the market’s faith in the euro improves, profit-taking could lead to a sharp upward correction in EUR/CHF – a key risk to our forecast.
DenDanske Weekly Focus 20100702

EMEA Weekly: Be careful with the rand

- Market movers ahead: Turkish inflation and Hungarian Minutes
"On Monday, we will get Turkish inflation statistics for June. In our view, the figures will confirm that inflationary pressures remain elevated in Turkey and that CPI-inflation has moved back to double-digit numbers. Hence, we put Turkish inflation (CPI) at exactly 10.0% y/y for June."
"On Wednesday, we will get the minutes from the latest Monetary Council meeting in Hungary. The meeting was held just as volatility in the Hungarian markets was spiking. It will be interesting to read how the Monetary Council members viewed the market turmoil and the reasons for the turmoil."
- FX Outlook: Rand could be heading for trouble
"The World Cup apparently has helped support the South African rand in the past couple of months and the continued strengthening of USD has probably also helped the rand outperform its Central and Eastern European peers. However, we think that we could be heading for a larger correction in the rand as the World Cup draws to an end. Furthermore, it is pretty clear from our EMEA FX Scorecard that both short- and longterm indicators point in the direction of a weaker rand going forward. All the sub scores are negative for the rand – weak macro, carry erosion, negative impact from global conditions (rising risk aversion), a fundamentally overvalued currency and negative technical picture. In fact, the only two factors playing in favour of the ZAR are the World Cup (but that will soon end) and high gold prices (which also have been losing some steam in recent days)."
"We would therefore recommend investors be short in the rand going into next week as we could soon be heading for a large negative correction in the rand."
- Komorowski versus Kaczyński
"On Sunday, Poles will have the opportunity to vote in the second round of the country’s presidential elections. Opinion polls indicate that it will be a close race between the liberal-conservative acting president Bronisław Komorowski and the social-conservative Jarosław Kaczyński. However, most opinion polls indicate that Komorowski will win on Sunday. We believe this result would be positive for the markets and could help push the zloty (slightly) higher going into next week but nothing is given and the possibility of Kaczyński winning does exist. His victory would probably trigger a negative reaction in the Polish markets."
- Scorecard trade of the week : Buy CZK/ZAR
"Last week, we recommended buying PLN/HUF based on our EMEA FX Scorecard. That trade was more or less flat over the week. This week, the Czech koruna is the highest scoring currency while the South African rand is the lowest. We therefore recommend - based on the EMEA FX Scorecard - to buy CZK/ZAR going into next week."
DenDanske EMEA Weekly 20100702

Weekly Credit Update

- "Credit indices have been volatile during the week"
- "Still activity in the primary market"
DenDanske Weekly Credit Update 20100702