Widespread optimism over the prospects of avoiding a “fiscal cliff” turned into pessimism towards the end of the week
- Demand for safe-haven assets had continued over the past month on the fiscal cliff risk until optimism early this week on apparent progress in negotiations pushed up appetite for risk. Signs that the two sides were getting closer to strike a deal (with concessions on taxes and spending that narrowed differences sharply) led to optimism; however, pessimism about the prospects for any agreement ahead of the year-end deadline returned after Mr. Boehner’s failure to gather enough support among Republicans to vote on Thursday on its “plan B”. The attempt to hold a vote and exert more pressure on the president to make further concessions failed, and both sides now have to engage again in negotiations.
Do recent developments point to an important change in central banking?
- Fed’s most recent move further suggests a change in Fed’s policy reaction function which seems to be now placing more weight than before on unemployment and less on inflation. This proves the challenges that the Fed is facing on attending to its dual mandate and its willingness to test unchartered waters. Beyond the Fed and the ECB decision, during this month the debate over the future of the monetary policy and the role of Central banks has intensified. In particular, the incoming BoE governor Mark Carney suggested targeting the level of nominal gross domestic product. While in Japan, this week the BoJ did not only announced an expansion of its asset purchase program by ¥10trn, to ¥101trn yen, as had been widely been expected, but also signaled that it will discuss its inflation target in January, with the BoJ under pressure from incoming government to revise the inflation target from 1% at present to 2%. This debate, closely linked to the failure of current policies to boost the economies, could pose some risks going forward.
Quiet week regarding Euro zone debt crisis
- This week Greece got good news as S&P has increased Greece's rating to B- from "selective default". The agency said that is confident that the EU has strong determination to preserve Greek membership in the euro zone. Moreover, on Thursday, the ECB announced it will once again accept Greek government bonds as collateral from banks, following the recent positive report by the Troika on the country's reform measures. On 20 July, it suspended its acceptance of such instruments pending the troika report.
The U.S. economy grew faster than previously stated due to better economic conditions. German economy is likely to gain traction again in the first half of 2013
- In the US, the 3Q12 GDP final report yet again surprised to the upside as GDP was revised up to 3.1% after already gaining 0.7% from advanced to preliminary reports. Driven by a shrinking trade gap and a rise in personal consumption, the final figure topped a Bloomberg survey of economists whose median estimate had 3Q12 growth at 2.8%. The aforementioned drivers showed especially strong growth from 2Q12 in addition to the revisions from the second estimate. In particular, the trade gap also shrank as consumers chose to seek products from the domestic market rather than abroad, driving import growth down to -0.6%, revised from the preliminary estimate of 0.1%. Exports also showed strong signs of growth as they rose 0.8% compared to the preliminary estimate, resulting in a 3Q12 figure of 1.9% QoQ. Moreover, business conditions for Philly region manufacturers this month improved noticeably; Philly Fed factory activity survey improved to a reading of positive 8.1 in December from -10.7 in November, above expectations. This was a busy week regarding housing data. Firstly, US homebuilder confidence rise, the NAHB index increased in December in line with expectations to 47, the highest since April 2006, from a slightly downwardly revised 45 in November. Meanwhile, housing starts decreased 3% m/m in November, after three consecutive months of increases. On the contrary, building permits increased more than expected, 3.6% in November, suggesting that the recovery in the US housing sector remained intact. Besides, purchases of existing houses increased 5.9% to a 5.04 million annual rate, the most since November 2009.
The German business confidence improved in December. The IFO indexes increased to 102.4 in December from 101.4 in November, led by the expectation sentiment, while the coincident index decreased. This figure is slightly higher than BBVA (101.8) and Consensus (102) forecast. This data along with PMI survey have already given upward signals, suggesting that German economy is likely to gain traction again in the first half of 2013, after the significant slowdown observed in H2 2012 (GDP could have dropped slightly in Q4 2012).Overall, these positive news (not only in Germany, but also PMIs in the euro zone as whole) suggest that the economy is unlikely to worsen further in coming months, although data is still limited to surveys. Moreover, as expected, Euro zone consumer confidence remained broadly stable at very low levels in November (-26.6; BBVA Research: -26.8; from -26.9 previously), suggesting that households' spending is likely to fall further by year-end.
- China’s Central Economic Working Conference (CEWC) took place over the past weekend, where its new leaders set the tone for economic policy in 2013. As anticipated, they pledged to maintain the continuity and stability of current policies so as to keep growth at a “steady and healthy” pace. Although, no specific targets for GDP growth or for total credit growth were given in the meeting, we project their ‘target’ growth rate will be 7.5% and expect it will be announced on or before the National Congress next March. Growth outturns typically exceed the official targets (we expect growth to rise to around 8% in 2013). Meanwhile, China’s National Development and Reform Commission (NDRC) called for an acceleration of reforms to the “Hukou system” (a registration system that effectively prevents rural workers from access to public services in cities). Such reforms would accelerate urbanization trends, a key driver of income and GDP growth in the years ahead. At the same time, however, it may also increase the demand for public services and add new fiscal pressures on local governments.
- Turning to Latinamerica, economic indicators pointed to a slight moderation for November in Brazil and for the coming quarters in Mexico. In Brazil, in line with expectations, the CB Economic Activity Index (IBC-Br) expanded 0.4% MoM (5.0% YoY) in October. By the contrary, in Mexico aggregate supply and demand showed signs of domestic moderation. Domestic demand performed well in 3Q12, especially private consumption (0.97% QoQ in SA series) and investment (0.95% QoQ). Exports decreased (-2.28% QoQ) in line with the US economy. Moreover, retail sales and wholesales decreased 1.03% MoM (3.5% YoY) and 0.97% MoM (2.3% YoY) respectively (in SA series), pointing to a slowdown in 4Q12 domestic consumption. In Peru, economic activity expanded 6.7% in October (BBVAe and consensus: 6.0%); hence, 4Q12 has had a good start and available indicators anticipate that output maintained this positive momentum in November. In Chile, the central bank adjusted its GDP growth range (4.25-5.25%) for 2013 upward and mentioned risks from the strength of domestic demand.
- Regarding Latinamerican central banks, Banxico’s minutes highlighted the fall in inflation but caution prevails on the Board. The fall in inflation and the lack of evidence of any second-round effects were behind the more relaxed tone of the last statement (30 November). Nonetheless, Board is cautious regarding the persistence of recent shocks and tied the monetary policy to the downward trend in inflation. In Brazil, the Central Bank announced a change in the reserve requirements for local banks as a measure to ease depreciation pressures on the Real.
- Demand for safe-haven assets had continued over the past month on the fiscal cliff risk until optimism early this week on apparent progress in negotiations pushed up appetite for risk. Signs that the two sides were getting closer to strike a deal (with concessions on taxes and spending that narrowed differences sharply) led to optimism; however, pessimism about the prospects for any agreement ahead of the year-end deadline returned after Mr. Boehner’s failure to gather enough support among Republicans to vote on Thursday on its “plan B”. The attempt to hold a vote and exert more pressure on the president to make further concessions failed, and both sides now have to engage again in negotiations.
Do recent developments point to an important change in central banking?
- Fed’s most recent move further suggests a change in Fed’s policy reaction function which seems to be now placing more weight than before on unemployment and less on inflation. This proves the challenges that the Fed is facing on attending to its dual mandate and its willingness to test unchartered waters. Beyond the Fed and the ECB decision, during this month the debate over the future of the monetary policy and the role of Central banks has intensified. In particular, the incoming BoE governor Mark Carney suggested targeting the level of nominal gross domestic product. While in Japan, this week the BoJ did not only announced an expansion of its asset purchase program by ¥10trn, to ¥101trn yen, as had been widely been expected, but also signaled that it will discuss its inflation target in January, with the BoJ under pressure from incoming government to revise the inflation target from 1% at present to 2%. This debate, closely linked to the failure of current policies to boost the economies, could pose some risks going forward.
Quiet week regarding Euro zone debt crisis
- This week Greece got good news as S&P has increased Greece's rating to B- from "selective default". The agency said that is confident that the EU has strong determination to preserve Greek membership in the euro zone. Moreover, on Thursday, the ECB announced it will once again accept Greek government bonds as collateral from banks, following the recent positive report by the Troika on the country's reform measures. On 20 July, it suspended its acceptance of such instruments pending the troika report.
The U.S. economy grew faster than previously stated due to better economic conditions. German economy is likely to gain traction again in the first half of 2013
- In the US, the 3Q12 GDP final report yet again surprised to the upside as GDP was revised up to 3.1% after already gaining 0.7% from advanced to preliminary reports. Driven by a shrinking trade gap and a rise in personal consumption, the final figure topped a Bloomberg survey of economists whose median estimate had 3Q12 growth at 2.8%. The aforementioned drivers showed especially strong growth from 2Q12 in addition to the revisions from the second estimate. In particular, the trade gap also shrank as consumers chose to seek products from the domestic market rather than abroad, driving import growth down to -0.6%, revised from the preliminary estimate of 0.1%. Exports also showed strong signs of growth as they rose 0.8% compared to the preliminary estimate, resulting in a 3Q12 figure of 1.9% QoQ. Moreover, business conditions for Philly region manufacturers this month improved noticeably; Philly Fed factory activity survey improved to a reading of positive 8.1 in December from -10.7 in November, above expectations. This was a busy week regarding housing data. Firstly, US homebuilder confidence rise, the NAHB index increased in December in line with expectations to 47, the highest since April 2006, from a slightly downwardly revised 45 in November. Meanwhile, housing starts decreased 3% m/m in November, after three consecutive months of increases. On the contrary, building permits increased more than expected, 3.6% in November, suggesting that the recovery in the US housing sector remained intact. Besides, purchases of existing houses increased 5.9% to a 5.04 million annual rate, the most since November 2009.
The German business confidence improved in December. The IFO indexes increased to 102.4 in December from 101.4 in November, led by the expectation sentiment, while the coincident index decreased. This figure is slightly higher than BBVA (101.8) and Consensus (102) forecast. This data along with PMI survey have already given upward signals, suggesting that German economy is likely to gain traction again in the first half of 2013, after the significant slowdown observed in H2 2012 (GDP could have dropped slightly in Q4 2012).Overall, these positive news (not only in Germany, but also PMIs in the euro zone as whole) suggest that the economy is unlikely to worsen further in coming months, although data is still limited to surveys. Moreover, as expected, Euro zone consumer confidence remained broadly stable at very low levels in November (-26.6; BBVA Research: -26.8; from -26.9 previously), suggesting that households' spending is likely to fall further by year-end.
- China’s Central Economic Working Conference (CEWC) took place over the past weekend, where its new leaders set the tone for economic policy in 2013. As anticipated, they pledged to maintain the continuity and stability of current policies so as to keep growth at a “steady and healthy” pace. Although, no specific targets for GDP growth or for total credit growth were given in the meeting, we project their ‘target’ growth rate will be 7.5% and expect it will be announced on or before the National Congress next March. Growth outturns typically exceed the official targets (we expect growth to rise to around 8% in 2013). Meanwhile, China’s National Development and Reform Commission (NDRC) called for an acceleration of reforms to the “Hukou system” (a registration system that effectively prevents rural workers from access to public services in cities). Such reforms would accelerate urbanization trends, a key driver of income and GDP growth in the years ahead. At the same time, however, it may also increase the demand for public services and add new fiscal pressures on local governments.
- Turning to Latinamerica, economic indicators pointed to a slight moderation for November in Brazil and for the coming quarters in Mexico. In Brazil, in line with expectations, the CB Economic Activity Index (IBC-Br) expanded 0.4% MoM (5.0% YoY) in October. By the contrary, in Mexico aggregate supply and demand showed signs of domestic moderation. Domestic demand performed well in 3Q12, especially private consumption (0.97% QoQ in SA series) and investment (0.95% QoQ). Exports decreased (-2.28% QoQ) in line with the US economy. Moreover, retail sales and wholesales decreased 1.03% MoM (3.5% YoY) and 0.97% MoM (2.3% YoY) respectively (in SA series), pointing to a slowdown in 4Q12 domestic consumption. In Peru, economic activity expanded 6.7% in October (BBVAe and consensus: 6.0%); hence, 4Q12 has had a good start and available indicators anticipate that output maintained this positive momentum in November. In Chile, the central bank adjusted its GDP growth range (4.25-5.25%) for 2013 upward and mentioned risks from the strength of domestic demand.
- Regarding Latinamerican central banks, Banxico’s minutes highlighted the fall in inflation but caution prevails on the Board. The fall in inflation and the lack of evidence of any second-round effects were behind the more relaxed tone of the last statement (30 November). Nonetheless, Board is cautious regarding the persistence of recent shocks and tied the monetary policy to the downward trend in inflation. In Brazil, the Central Bank announced a change in the reserve requirements for local banks as a measure to ease depreciation pressures on the Real.
