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Government Assets Owners - Global Economics Weekly

Global Economics Weekly Brief

* Government Assets Owners - the few, the proud!

James Carville, advisor to President Clinton, once famously quipped that if reincarnated, he would like to be the bond market, because it intimidates everybody. While the bond market remains near-omnipotent, central banks, especially the European Central Bank (ECB) are becoming stronger David’s 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. This action will mean there will be just a few owners of all the government assets global. What about the banks? There will be fewer banks globally. Plus, borrowing money will be very expensive!

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. Let us wait for the government figures first before we jump up and down!

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. There are so few house buyers across the whole housing market! Plus, banks are not lending money easily!

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.

UK Banks may have to raise £20bn for lending buffer. British banks could have to raise more than £20bn in additional capital if regulators move ahead with threats to increase the size of the buffer lenders must hold against their mortgage books. It will be so tough to borrow money soon the whole lending market is freezing!

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 EU is in serious trouble in many areas - unemployment/businesses going-bust/governments running out of money/people leaving the countries to find work elsewhere (but where?)!

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. The Eurozone is in deep trouble.

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 (do you really believe these figures?). 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. The reality is there is more unemployment on its way?

Chinese monetary tinkering continues. China moved to give credit conditions a boost last week by injecting around £36 billion into its banking system. It was the largest injection in six years and interbank lending rates promptly fell. The move is welcome (and done partly in response to heightened demand for cash ahead of a week-long holiday) but more aggressive monetary easing in China remains conspicuous by its absence. Cushioning the slowdown rather than engineering a strong growth rebound remains the policy order of the day. There may also be some concerns amongst policy-makers on the global inflationary impacts from the latest round of quantitative easing in the US. Manufacturing is now suffering with a massive slowdown in orders! More misery to come as more employees seek better working conditions and higher wages.

Colin Thompson

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Government Assets Owners, the few, the proud!

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