Outright Monetary Transactions - OMTs
Global Economics Weekly Brief
The big news last week was the launch of Outright Monetary Transactions (OMTs) by the European Central Bank (ECB). The markets responded well to the President Mario Draghi’s policy, which allows the ECB to buy unlimited bonds from Eurozone countries in difficulties.
The idea is that this will help to keep sovereign borrowing rates at sustainable levels by reassuring markets that the ECB is committed to keeping the Eurozone intact. If this continues to bolster confidence and stability, it will be good news for everyone. In the UK it will add to the positive survey reports from businesses, confirmed in official data. In the US anything will help, especially after disappointing jobs data make it look almost certain that the Fed will launch another round of quantitative easing.
OMG it’s the OMT! The ECB left interest rates at 0.75% at its September meeting but President Draghi spelled out the details of Outright Monetary Transactions (OMTs). It sounds like a game show, but in fact it’s a new bond-buying programme with two main aims. The first is to help fight “unfounded” fears of a Eurozone break-up. The second is, through this, to restore the transmission mechanism of monetary policy in the euro area, which has been severely damaged during the crisis. But there are strings. Countries that want to benefit have to have made a formal request for help and agreed to “strict and effective” rescue programs. The Bundesbank is firmly against the policy, believing that it’s tantamount to printing money. But with unemployment at a record-high of 11.3% in July and the Eurozone economy likely go into recession in Q3, President Draghi wanted something big and bold to settle nerves. Who will eventually pay for all this borrowing? You the tax payer!
No change, no surprise at this month’s Monetary Policy Committee Meeting. In the UK, the MPC left both the Bank Rate and the Asset Purchase Scheme unchanged. The Committee may be closer to cutting rates than it was a few months ago, but it wasn't likely to alter course when the Funding for Lending Scheme was barely a month old. The upwardly revised GDP figures for Q2 may have steered the Committee away from more loosening just yet, but there is still a way to go before it will be happy that the economy will be OK without it. Happily inflation expectations waned in Q3 which gives the MPC one less thing to worry about.
Better news on the UK economy in August. The PMI (Purchasing Managers’ Index) survey for UK manufacturing rose to 49.5 from 45.2 (a reading below 50 indicates contraction) - a clear bounce from July. The PMI survey for services was more encouraging. It rose to 53.7 from 51. While PMI surveys have been an inconsistent indicator of GDP performance, these data will raise hopes that the UK economy can pull itself out of recession in Q3. Official data on industrial production were also mildly encouraging. Overall production in July was down 0.8%y/y and manufacturing down 0.5%y/y, but both are improving and are at their highest level since September 2011. * Read this report below UK Manufacturers see toughest trading conditions in nearly 3 year, plus, Downturn in Eurozone manufacturing continues!
Eurozone economic slowdown intensifies in August. In contrast to the UK, the composite PMI for the Eurozone, covering manufacturing and services, dropped to 46.3 from 46.5 in July. Another contraction in output doesn’t bode well for avoiding recession in Q3. The data show that weakness was broad based across the region, but the rapid fall in exports in France and Germany is worrying. Exports limited the extent of the fall in Eurozone GDP in Q2 to 0.2%. Without them, output is likely to shrink in Q3 too, putting the Eurozone officially in recession. More businesses `going-bust` and more unemployment on its way!
Bet the farm on QE3 in the US. The US ISM Manufacturing survey came in at 49.6, the third successive sub-50 reading and a value consistent with wider growth in Q3 of 1-2%, which is less than is needed to bring unemployment close to target. Aside from rising employment, the details of the survey are depressing. New orders are falling more quickly and inventories are rising (53.0 from 49.0). The backlog of work is falling (42.5 from 43.0). This isn’t good news for the economy, but it probably is for shareholders in warehousing companies!
US job growth disappointed in July. Only 96,000 US jobs were created in July, well below expectations and even further below the average monthly growth of 139,000 in 2012. Paradoxically the unemployment rate fell from 8.3% to 8.1%, but this isn’t good news. It was only achieved because more people have given up looking for jobs. The participation rate in the US fell to 63.5% in July – its lowest since 1981. Overall the output and employment data make it seem almost inevitable that the Fed will launch another round of quantitative easing very soon. Again, more unemployment on its way!
* UK manufacturers see toughest trading conditions in nearly 3 year, plus, Downturn in Eurozone manufacturing continues
Over the past quarter the UK’s manufacturers have seen some of the toughest trading conditions since the end of the recession, according to a major survey released today by EEF, the manufacturers’ organisation and business advisers BDO LLP.
In response to EEF & BDO’s previous survey (6 June 2012) manufacturers had anticipated some softening in output and orders, but today’s survey showed a more marked weakening than expected across a range of indicators. The balance of responses on output over the past three months fell to its lowest level since 2009q4 and the orders balance was the weakest since 2010q1.
The survey clearly indicates that slower demand both at home and overseas is hitting order books, with responses on UK orders turning negative for the first time in ten quarters. And further analysis of our survey results suggests that the drop in export orders is not limited to sluggish demand in crisis-hit eurozone economies.
“The weaker global outlook precipitated by the on-going economic challenges in Europe has clearly hit home in our latest survey," Commenting, EEF Chief Economist, Ms Lee Hopley, said.
"Pockets of growth still remain in some sectors, but overall confidence appears to be draining away. The sharp drop in export balances over the past quarter is a particular concern given their importance to UK manufacturers and also our economy’s reliance on exports as a source of growth.
“However, some positive news can be taken from the improvement in the short term outlook and the continuing commitment to invest across manufacturing, as companies look to their competitiveness and market opportunities in the medium term.
“It’s encouraging to see that companies are not planning for a further deterioration in conditions as we head into the final months of the year. But, the risks of a more prolonged period of weak growth in global markets, which would continue to make economic rebalancing an uphill struggle, can’t be ruled out.”
Tom Lawton, Head of Manufacturing at BDO LLP, said: “The results of the survey paint a dark picture with weakening markets across the board. Inevitably Europe continues to serve as a drag on exports and even the previously buoyant emerging markets are beginning to falter. With this extremely testing global backdrop it is crucial that manufacturers remain not only lean but also nimble enough to respond to future opportunities as and when they arise. This is something that the sector has not been good at in previous recessions.
“However, it is not all bad news. Larger companies that have the ability to invest are continuing to do so and smaller companies are wary of not suffering a skill shortage by ensuring that they employ the best talent. All of this in the face of worsening market conditions. This indicates that manufacturers have learnt the mistakes of the past, are investing for the long term and are preparing themselves for an upturn in the market, whenever and wherever this may occur.”
Downturn in Eurozone manufacturing continues
The Eurozone manufacturing sector contracted for the thirteenth successive month in August. At 45.1, up from July’s 37-month low of 44.0, the final Markit Eurozone Manufacturing PMI came in below the earlier flash estimate of 45.3.
Business conditions deteriorated in the vast majority of the national manufacturing sectors covered by the survey. The sole exception was Ireland, although even here the rate of expansion was less marked than one month ago. Downturns in Germany, France, Spain, the Netherlands and Greece all eased during August, but accelerated in Italy and Austria. Greece remained rooted to the foot of the Eurozone PMI league table.
Manufacturing production was scaled back further during August, reflecting the long-running downturn in new business. Rates of contraction in output and new orders were both slower than in the previous month, despite being slightly faster than the earlier flash estimates.
Ireland was the only nation to report an increase in output during August. Modest contractions were seen in the Netherlands and Austria, but production continued to drop sharply in the other nations covered by the survey — including the big-four of Germany, France, Italy and Spain. However, Italy and Greece were the only countries to signal a faster rate of contraction than in July.
Eurozone manufacturers were hit by weaker inflows of new work from domestic markets, falling levels of intra-Eurozone trade and a broader softening of global economic growth. The level of incoming new export orders declined for the fourteenth month running in August, with the rate of contraction the steepest since November 2011. The steepest drops in new export business were registered in Germany and Greece, the fastest since April and January 2009 respectively.
Signs of excess capacity and cost cautious behaviour remained evident at Eurozone manufacturers during the latest survey period. Backlogs of work fell for the fifteenth straight month, despite reports of further job losses.
Meanwhile, the ongoing downturns in output and new orders led to reduced levels of raw material purchasing and lower holdings of both pre- and post-production stocks. A solid improvement in average vendor lead times also highlighted the availability of spare supply-side capacity.
Employment fell for the seventh successive month in August, with Ireland the only nation to report an increase. However, the rate of decline across the euro area manufacturing sector was less marked than in the previous month (when payroll numbers were cut at the fastest pace since January 2010). The steepest reductions were reported in Spain, Italy and Greece, but Italy and Austria were the only nations to report steeper rates of job losses.
Input prices decreased for the third month running in August, with lower commodity prices highlighted by companies. However, the pace of reduction eased from the sharp rate seen in July. Rates of input price deflation eased in Germany, France, Italy, the Netherlands and Austria. Higher costs were reported by Spain, Ireland and Greece.
The drop in input costs was partly passed on to clients in the form of lower output prices, although the rate of decline in prices charged was only slight. France and Austria reported marginal increases in selling prices, contrasting with reductions reported in the other nations.
“The final reading of the August PMI confirms that the Eurozone manufacturing sector remains firmly in contraction territory," Rob Dobson, Senior Economist at Markit said.
"The rate of decline was a little slower than in July, providing some heart that the manufacturing downturn may be easing, but the sector is on course to act as a drag on gross domestic product in the third quarter.
“The national picture remains one of widespread contraction. Only Ireland saw manufacturing output rise, while larger nations like France and Germany remain in reverse gear. The situation in Italy is also becoming more of a cause for concern, as it falls further down the PMI league table.
“The ongoing weakness is unsurprising given that Eurozone manufacturers and their clients are still in a largely defensive mode. The uncertainty and cost caution resulting from the currency union’s ongoing political and debt crises are now being reinforced by softer global economic growth. This is hitting domestic markets, intra-area trade and overseas trade alike and is one of the main factors underlying the job losses and excess capacity signalled by the latest PMI survey.
“The broader long-run issue is that the Eurozone product and labour markets are unlikely to show any real sustained improvement until regional structural issues are addressed and the broader global backdrop brightens.”
We live in a global trading environment of which there are so many players chasing very few opportunities that it is driving down prices globally and still people do not wish to buy!
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Outright Monetary Transactions - OMTs