US: Labor market report in focus

ECB: Markets waiting for hints concerning corporate bond purchases

US: Labor market report in focus

Eurozone: Austria, France and Italy promise budget cutting efforts

ECB: Statements concerning corporate bond purchases expected

Any significant change to the ECB’s monetary policy at the upcoming meeting on Thursday seems highly unlikely. The most interesting question will be whether any hints concerning corporate bond purchases by the ECB are issued. Rumors concerning an additional asset purchase program appeared during the last few weeks and were not clearly denied by ECB officials. Indeed, expansion of the ECB’s balance sheet could prove difficult with the measures in place. Due to the size of the respective markets, purchases of covered bonds and ABS have limited potential. With TLTROs, on the other hand, the ECB is not fully in control, as the amount of liquidity supplied depends on the demand (or net lending) of banks. Things are made additionally difficult, as banks are continuously repaying long-term financing by the ECB, leading to a decline of the ECB’s balance sheet for several years. These long-term financings will become fully due at the beginning of next year. So, the ECB will have to add EUR 400bn through other measures just to keep the balance sheet size stable. No wonder the markets are speculating on if and when the ECB might implement additional measures to expand its balance sheet. We do not expect any concrete purchase program to be announced on Thursday. However, it will be interesting how ECB President Draghi responds to questions, which will definitely be asked, concerning corporate bond purchases, and which leads he gives the markets concerning this topic.

Will US labor market data confirm FOMC’s improved assessment?

The most important release in the US next week will be labor market data scheduled for Friday. September numbers already showed a very strong performance, bringing the unemployment rate below 6%, a post Lehmancollapse low. The FOMC reacted to this data set this week and upgraded its assessment of the labor market. Should the upcoming numbers show further improvement, this would spur interest rate expectations and move markets.

Italy and France promise budget cutting efforts

At the request of the European Commission (EC), France and Italy have this week promised further budget cutting efforts. With further savings of EUR 3.6bn, France intends to lower its structural deficit for 2015 by another 0.5%, to 1.7% of GDP. Lower assumptions for interest payments, combined with enhanced measures to catch tax cheats, should deliver the intended savings. Italy finally submitted additional savings worth EUR 4.5bn that should lower the structural deficit by 0.3% (previous reduction was 0.1%) to 0.6% of GDP. In order to achieve this aim, Italy is to eliminate planned tax cuts and furthermore intends to speed up privatizations. Recently, however, Italy has made no significant progress in this area (the privatization of Italian Post has already been postponed). Based on these additional measures, the EC could not identify any serious shortcomings in the revised budget proposals of member states. On November 30, the EC will publish its recommendations for member state budgets. From our perspective, the growth and inflation assumptions are quite optimistic (especially those from France). We therefore believe that prolonged stagnation in combination with low inflation could result in renewed budget discussions in autumn 2015.

Austrian government aims at reaching zero structural deficit by 2016

Along with France and Italy, Austria also provided improved budget figures for 2015 to the European Commission this week. A declared mutual goal is to achieve a zero structural deficit (a structural deficit of less than 0.45% of GDP) in 2016. In its reply letter to the European Commission, the Austrian Ministry of Finance committed to improving its planned budget figures for 2015 by 0.3% of GDP (aiming at a structural deficit of 0.7%). This should be achieved by additional measures, including moderation of increases of pensions and public salaries, implementing the proposals of the Commission for Task Reform and Deregulation, reduction of public subsidies, savings from regions and municipalities and measures to combat fraud.

Austrian economy stagnant in Q3 14, Q2 GDP growth revised downwards

On October 30, WIFO published the flash estimate of GDP and its components (according to ESA 2010). WIFO estimates zero GDP growth in Q3 14 on a q/q basis (Q2: 0.1%, Q1: 0.2%). The y/y rate declined in Q3 to 0.2%, from 0.6% in both Q2 and Q1. The present stagnation results primarily from a decline in investment activity (GCFC: -1.1% q/q in Q3, building investment: -1.7%, equipment investment: -0.7%) and a substantial weakening of exports (-1.3% in Q3 14). We will adjust our GDP forecast for 2014 (presently 0.8%), taking into account the development of the economy in Q3 as soon as the necessary data is available. However, the results of the WIFO flash estimate suggest that the forecast might have to be slightly revised downwards (by 0.1-0.2%).