IMF predicts a 80% probability of eurozone recession in 2013

Outlook:

We get the Treasury International Capital (TIC) report at 9 am today disclosing long-term capital flows. Only about five people can understand the report so we await the interpretation from Bank of NY Mellon economist Woolfolk, who is one of the diligent few. A little later we get Oct industrial production, expected up only 0.2% after 0.4% the month before. The problem: the forecast range in the Bloomberg survey is a 0.3% drop to a 0.6% gain. Whatever the response, it should be colored by acknowledgment that the $50 billion in hurricane losses will get re-built. As long as it doesn’t entail buying moldy wallboard from China, a disaster can be an economy booster.

But unless there is a data surprise, the important thing today is any whiff of progress on the fiscal cliff talks. From now on, the mood of many markets will depend on the stock market’s judgment of how talks are proceeding. No sane person would put equity traders in charge of such an important judgment, but there it is. If the pundits are right and progress is slow, we may get a slow grind downward… but the good news is that the best time to buy equities is when there is blood in the street. We still think a deal gets done and equities rally like a banshee.

The EMU sanity check:

  • The eurozone is officially in recession, with Q3 GDP down 0.1% after -0.2% in Q2. The IMF predicts a 80% probability of eurozone recession in 2013. The European Commission say 2012 growth will be 0.4% and cut its eurozone growth forecast to 0.1% in 2013 from 1% in May. German growth was cut in half to 0.8% from 1.7%. France will contract by 1.4%.
  • S&P cut Spain's rating two notches to triple-B-minus, one step over junk, and Moody’s has the same rating (Baa3), also one notch over junk. Moody’s cut the ratings of half the Spanish regions. S&P cut the SocGen rating by one notch and issued a negative outlook for the other two big French banks on deteriorating conditions.
  • The EU banking supervisor will be established by year-end but may not have the authority to recapitalize the Spanish banks for another 6-12 months.
  • Greece still needs Bailout Two. It raised short-term money to redeem a €5 billion bond on Nov 16, but has total debt of €327 billion, of which the EFSF holds €74 billion and individual countries another €53 billion. Together these loans account for 78% of Greek GDP.
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