Overall, yes, today’s ‘Flash’ UK GDP figures aren’t pretty.

 But in perspective, the result is generally being taken to indicate a far less dire state of play for the UK’s economic state and performance than the headlines [data and Fleet Street] suggest.

Also, it goes without saying that we need to come armed to these figures with the idea of ‘technical recession.’

With that in mind, the notion that the UK was not in recession yesterday, or last week, or last month or even last year - but that the economic climate has since degenerated into one during the last quarter, is a bit silly.

Capital Economics Chief Global Economist Julian Jessop says the market’s reaction was rational:

“The market reaction to the news that the UK is back in recession, at least on the basis of two successive quarterly declines in GDP, was remarkably muted.

Sterling wobbled only briefly, while gilt yields and the FTSE still rose over the course of the day. This sanguine response does make some sense.

After all, the difference between the 0.2% q/q fall reported in the preliminary data for Q1 and the 0.1% q/q rise expected by the market is pretty small and could yet be revised away.

Either way, the level of GDP is still well below its peak. What happened in the first quarter is also largely old news, with the forward-looking surveys mostly a little better.

The MPC itself pointed to the possibility of a drop in output in Q1 at its last meeting and indicated that it would place greater weight on the more upbeat surveys.”

UniCredit Global Chief Economist Erik F. Nielsen reminds that the data are not a major surprise:

“While consensus and we expected modest positive growth, this outcome doesn’t come as a total surprise. There was great uncertainty about today’s figure: on one hand, business surveys pointed to decent positive growth; on the other hand, we knew that construction was going to be a significant drag (output in the sector fell -3% qoq) and that output in the production sector was going to be negative (-0.4%).

What was a bit surprising, and disappointing, was the weakness in the services sector (+0.1%), which contrasted with the positive message from business surveys.”

Monument Securities Chief Global Economist Stephen Lewis casts a sceptical eye over the important Construction component of the data:

“Last year the official statisticians estimated the rate of contraction in construction activity, 2011Q1 on 2010Q4, at 4.7%, compared with which this year’s 3.0% decline might be regarded as mild.

The point is, though, that the ONS now estimates the quarterly fall in construction output in 2011Q1 at only 1.5%.  If a similar adjustment is eventually made to the 2012Q1 preliminary estimate, it may turn out that construction output did not fall at all in that quarter. 

Since construction makes up 8% of total GDP, an adjustment on that scale might even leave GDP growth very slightly positive for the quarter.

Despite the negative 2012Q1 GDP data, all is not gloom for the UK economy, or so it appears.  The latest quarterly CBI industrial trends survey has uncovered remarkable buoyancy in respondents’ confidence.  The survey’s balance of business optimism swung from -25 in January to +22 in April.”

UBS Strategist Chris Walker:

“Leading indicators such as services PMI have stabilised since earlier in the year and returned to expansionary territory. We think today’s weak Q1 GDP print is liable to be revised later, and the weak headline number is hard to reconcile with recent forward-looking data.”

BNP Paribas UK Economist David Tinsley:

“There’s something for everyone in the UK data today. On one reading the UK is in a double-dip recession. On another the manufacturing sector is poised to lead the economy to sunlit uplands of sustainable growth. The truth, probably, lies somewhere in between.”

Compiled by ThSM

Part I

Pre-load:

• Critical series of posts about LTRO
• Facts, figures, a few fatuous opinions and a bit of fun
• Part I touches on LTROs we’ve had so far and their apparent effects

Another indecisive session for equity markets, albeit a more moderate one than we’ve had of late, during which stocks and other risky assets have slid alarmingly.

And in Spain, the epicentre of the latest euro-zone worries, the 10-year bond yield remains close to 6%, having recently peeped above that for the first time since November 2011.

Plus, the euro has been threatening another visit below the 1.30 barrier all week.

There’s no getting away from it: the crazy days last seen at the height of The Crisis, in 2011, could still be lurking not too far below the surface of euro-zone markets.

Not that I’ve met many people in this parish and beyond who would be genuinely surprised if that proves to be the case.

The idea that joint efforts by EU leaders, IMF and ECB [via SMP and latterly LTRO] have succeeded in stemming the debt crisis, is questionable, at best, in my view.

Still, it’s a notion which many market participants are happy to play along with while it suits them.

But even if we accept that view, who in the markets wouldn’t want another LTRO?

Markets do seem to be behaving as if they want another one.

After all, their apparent effect on more hazardous markets is well-known and benign.

Markets, are behaving en masse as if they seek to ‘re-live’ these apparent effects, very much like the ‘addicts to central bank funding’ which critics say markets have become.

This underlying desire for more cheap, cash [it’s difficult to imagine why markets would want such a thing] raises the issue of whether the widely held perception of what LTROs achieve is, in fact, valid.

It’s a question which the ECB is likely to consider closely.

Perhaps we should too.

I.e., apart from providing cheap money for over-privileged financial institutions, do LTROs help anyone, or anything else, in any material way?

There’s a widespread suspicion that the perceived effect of LTROs and their actual effects are quite distinct from each other.

And, if LTROs in fact don’t have enough of the effects which are desired, is it really worth chucking another EUR529.5 billion at ‘The Problem?

[EUR529.5 billion was the amount allotted at the second 3-year LTRO, held on February 29th.]

Comments from ECB President Draghi at the press conference which followed the ECB’s last interest rate announcement [rates were kept at 1%] make it clear that another flood of ECB cash has not been ruled out.

But perhaps it should be ruled out.

If it can’t be demonstrated that ECB long-term cash floods help the wider financial system [including individuals and households] that tends to weaken the case for opening the taps again.

Have the LTROs boosted European sovereign bond prices and helped credit expansion in the real economy?

Or has the credit injection just stayed in the banking system to ease the inter-bank credit squeeze and provide funding for bank debt redemptions?

I’m guessing we all already suspect what the answer is.

But fellow market-macroeconomics geeks will take a look at the next post in the series – I’ll tweet when it’s done.

 * The pun ‘LTROver’ has already been used; quoting  the source slightly obviates me from blame.

 
Meze

• JPMorgan still warning portentously of Greece’s ‘Ides of March’
• As for the rest of us, we’re almost ‘over it’ already, though no one thinks a default will be an easy option

JPMorgan has published a portentous note this morning.
 
It’s titled ‘Risk of Greek default and exit rises’.
 
Well maybe the risk is rising, especially given events over the last week.
 
Not to mention also that Greece has EUR14.4 billion worth of debt redemption payments due close enough to the fabled March 15th for headline writers [like me, I admit] to have a field day [the deadline is March 20th, actually].

Let’s be clear: without this assistance from official lenders and a restructuring of its debts, Athens will default on its payment.
 
Effectively, it would be treated by international markets as having gone bust.
 
On the other hand - take a look at the stock markets right now.
 
Most major stock markets are in the green.

Even if not by huge amounts; and even as chatter about a more serious delay of the bailout process hits the wires.
 
Greece’s potential scenarios are burned into the synapses of anyone who watches financial markets.
 
And many people who don’t are also more cognizant of Greece’s predicament than they’d like to be, given the saturation coverage of everything ‘sovereign debt crisis’ over the last couple of years.
 
Finally, the taboo of an exit from the euro zone amongst our leaders, broke some months ago.
 
EU leaders openly musing about Greece not being in the euro zone is almost de rigeur nowadays, having been something few would countenance publicly just half a year ago.
 
So let the penny drop to the ‘Cassandras’ amongst us - at least in terms of their disingenuousness.
 
Of course, we know, that ‘they’ know - privately, that we know, that they know. Etc.
 
A reminder that JPMorgan and others have massive bets against Greece and would profit big if Greece were judged to have defaulted.
 
Perspective rocks. But only ever so gently when it comes to markets nowadays!
 
ThSM

Personally, I’m making an effort to remain alert as we go into the 2 millionth Summit [slight exaggeration] to discuss the euro-zone crisis.

No matter how monotonous this newsflow has become though, it can still spring surprises - including for the market of course.
 
Here are the main focus points to keep a close eye on, in my view:
 
Overall, the Summit is expected to focus on finalizing the ESM. [Replacement for EFSF]
 

• Whether to top up the mechanism to EUR500B-EUR750B is in the balance.
• Probably a bit less than half of the amount decided on would be available for new commitments, if needed in the future.
• [Recall there was talk of matching involvement by the IMF, broadly speaking.]
• Nobody expects all of the above to be resolved tonight.
• However, progress is likely.

Still, 2Q could be another nervous, largely sidelined month!
 
 
The ECB isn’t responsible for any of the following…
 
Tacitly, and at times not so tacitly at all, European officials have steered opinion  [that’s as strong a phrase as we can use without shattering the ‘treaty’ notion I think] toward the idea that this new fiscal compact and policies to stimulate economic growth and employment might be thought of as consequentially linked to expanded central bank policy.
 
 

And what do you know, the ECB has indeed complained explicity of late that fiscal compact plans have been watered down compared to original proposals in December.
 
This is the ECB just concerned about fiscal rectitude, mind. There’s no suggestion of contingency here. None at all.
 
 
All the same, the market will pry over details of the proposed treaty changes with a fine toothcomb. 
 
 
Markets of course hope that the agreement will give the ECB more room to maneuver, given that stricter rules and further budgetary oversight are likely to limit moral hazard concerns.
 
 At the same time, it’s also hoped a new fiscal compact will help stabilize markets and reduce the fiscal risk premium in the euro zone.
 
Meanwhile, Greece’s PSI dicusssions limp on.
 
Perhaps most saliently, we can note word out of Greece in the last 24 hours rejecting calls for a budgetary commissioner to oversee the Greek budget as part of a new bailout package. And officials in Berlin consequently turned that new mood music down a bit in response to Greece’s rejection signals.
 

Expect attention during this latest, not-so-greatest Summit, to pivot on developments on those two broad fronts - conditions for a new bailout injection and yes, Greece’s PSI negotiations.

Naturally, neither are near the top of the agenda in line with the generally upside down way we in Europe deal with sovereign debt crises.
 
ThSM

o-song:

Insider Baseball by Joan Didion (New York Review Of Books): This essay just nails the ways in which politics is basically upmarket reality TV (in that almost everything about what most people see and read about politics is content which has been deliberately manufactured to fill in TV…

At this point, the ECB seems unlikely to produce any material changes in policy with its announcements on Thursday.

========================================================

T&C reminders:

• please see disclaimer at head of this blog.
• please note the peculiarities of my discursive style: I try to make it empirical, but this isn’t the place for an excess of references and data
• If you require such references/data, please note they are widely and publicly available

========================================================

 
Additional conventional easing seems improbable.
 
In December the decision to cut by 25bp was taken by consensus.
 
Also, note one governing council member let it be known they were opposed to consecutive rate moves.
 
On the other hand the ECB is very likely to keep its easing bias - signalled by some of the words it used in its statement following December’s meeting: “substantial downside risks” to growth.
 
As for the ECB’s ‘unconventional options’, it still looks premature to try to assess the effectiveness of the latest round of the ECB’s non-standard measures.
 
Note most of the liquidity taken on by banks at Autumn’s 3-year LTRO has since been parked overnight at the ECB, with deposits regularly continuing to hit new historical highs.
 
Banks are hoarding cash, unsurprisingly.
 
On the SMP side, the ECB as The Man From del Monte is still saying ‘no’, quite emphatically.
 
But many continue to wonder if at some point the ECB might fudge some form of wider accommodation than we’ve seen so far via the SMP.
 
My view: it seems reasonable that the European authorities would try to get a closer look at how distressed sovereign debt fares in response to the entire zone moving toward a tighter fiscal compact.
 
For instance we can see that Italian and Spanish curves have benefited from the enormous 3-year cash injections at the quarterly LTROs, but the long end is still a battle field.
 
This reflects the fact that the weakest euro-zone states are still facing tougher financial conditions than the rest of the euro zone, even after suffering harsher fiscal adjustment.
 
However if by February’s scheduled 3Y LTRO there does not appear to be any appreciable cool-down in yields, this surely increases the chances that the ECB will crack in some way.
 
[Even if it does not guarantee that the central bank in fact will.]
 
Last but not least the so-called Real Economy.
 
Since the December meeting, it’s probably fair to say leading indicators have signalled some economic stabilisation.
 
Additionally, composite PMI and Ifo expectations have now been stronger for two-consecutive months.
 
Anecdotally economists appear mostly of the view that data for 4Q11 point to a minor euro-zone GDP contraction.
 
Also we can note the ECB expects CPI to move towards 2%, judging by its latest set of forecasts.
 
Finally of course, it’s always worth reminding ourselves that euro weakness is probably the most effective stimulus to the euro-zone economy at the present time.

It may be an unintended side effect, but it does buy some time.

ThSM

© Harry Dorset, Autumn 2011; used with permission

It’s on a building at 68 King William Street, London EC4N 7HR.

Here is the Google StreetView, for a rough idea. [The clock is visible, the owl, not.]

Owl Bait:

• King William Street is a prominent example of The City of London’s ‘Bank Conservation Area.’
• KWS was laid out in 1829-35 to connect the new London Bridge, designed by John Rennie, to Bank and Moorgate completed in the 1840s.
• Estate agents continue to describe the building as ‘The Gateway to the City.’
• The current occupant of the building is House of Fraser. 
• An earlier occupant was a venerable British company called Guardian Insurance. It still has an owl as its logo.

ThSM

Chimera at Holborn Viaduct, Autumn 2011

© Harry Dorset, 2011 

Click the image to see the approximate location with Google StreetView.

The statue in question isn’t very easy to discover with StreetView however; you might just have to visit to learn its precise location.

ThSM

Griffin at London Bridge, Autumn 2011, © Harry Dorset, 2011 

Perhaps you’ve noticed we prefer the ancient icons of our Square Mile, to the more recent ones: we favour the griffins/dragons, cherubs, daemons, lions and the like, over the skyscrapers and post-modernist structures.

Well, we’ve been lucky enough to have received permission to use several new, original photographs of ancient icons of The City.

We will try to publish at least one of these new photographs each day for the next few weeks.

Once they have all been published, we hope to produce a permanent online resource especially suited for displaying all them in the same place.

The photographer is Harry Dorset.

We are very grateful indeed for his generosity and it won’t be forgotten.

All rights are reserved.

If interested in further use, please see the statement of copyright linked in the copyright symbol.

ThSM

Espresso

• 7% rate on all debt would cost just EUR140B
• Italy projects it will collect c. EUR500 bln taxes in 2012
• Italy’s Total Debt Scenario Relatively Tame
• Italian household debt is about 40% of GDP
• Risk/Scope for Financial Repression

Some factors for seekers of ‘alpha’ to bear in mind about Italy, where newly-installed techno-warrior Super Mario works to form a government.

[Alpha. From bond yields.]
 
Italy’s average debt maturity is a little above 7 years and that’s among the longest in the euro zone. This coupled with its large stock of existing debt suggests that the rise in average yields will take some time to filter into Italy’s real debt burden.
 
7% rate on all debt would cost just EUR140B
The 2012 budget assumes Italy’s debt servicing costs of about EUR85 bln.
In theory, if Italy were to pay 7% on all its circa 2 trillion euro debt, that would cost about EUR140 bln.

Italy projects it will collect c. EUR500 bln taxes in 2012.
That still leaves quite a cushion if the debt servicing estimate is too low and tax collection were to be high.

Italy’s Total Debt Scenario Relatively Tame
Let’s also think about the complete debt picture - not just sovereign debt. Public and private debt do have an interface, especially in Italy.
If both broad debts were combined, Italy’s overall debt would still be amongst the lowest in the OECD.
 
Further, Italian household debt is about 40% of GDP.
This compares with a European average of closer to 75%.
In the US, household debt is near 90% of GDP, having peaked close to 100% in 1Q09.
Italy’s government debt is about a quarter of household net wealth.
 
Finally, the term and implications are horrible, but we need to also touch on Financial Repression
 
Arguably, the fact that US nominal yields are said to have pushed real yields well below zero, is a form of FP.
 
However in Italy, financial repression could hypothetically, cut much deeper.

Domestic accounts own about 55% of Italy’s government debt.
That affords, for instance, such measures as bond swaps being foisted on ‘domestic institutions.’
Similarly, domestically-focused institutions [for instance pension funds] could be required to hold more government bonds in pension portfolios.

OK, one more thing - a side issue really, as the following isn’t really an option in my opinion, but recently, there’s been something of a hum coming from pundits asking: should Italy sell it’s gold reserves?
 
The ‘Red Herring’ aspect of that is largely centered on the facts that European central banks officially own their state’s gold and are independent; and additionally use of reserves is governed by EU treaties.
 
Yes, we’ve learned of late that treaties are made to be ‘voluntarily’ broken.
But it seems likely some will be relinquished less easily and with graver consequences than others.
 
ThSM

If Wednesday’s market moves in Europe are just half as volatile as they were in the relatively illiquid overnight conditions, it’ll be an ‘interesting’ day.

Just after London’s close, the euro spiked circa 80 pts to 1.3760/65, as did other risky assets amid headlines quoting an unnamed source who suggested the Prime Minister of Greece’s referendum bid was “basically dead.”

Gains were subsequently unwound after headlines indicating Papandreou  told his Cabinet that he would hold the referendum after all.


S&P closed 2.8% lower.

Then, whilst we were sleeping; a headline early in the Asian session said Greece would “vote on EURO membership in the referendum” This knocked EUR lower again (c. 70pts to 1.36301/35).

Finally [it’s probably healthy to end around here] a meeting of Greece’s Cabinet concluded still early in Asia and officials unanimously agreed to hold the referendum; and to hold it before Christmas.

Initially the expectation was to have it in January: the small surprise provided a small risk on tone.

EUR is moderately bid.

Strap in.

ThSM

moorehn:

So, I have a problem. I have a BlackBerry Bold and I need to replace it. It is unreliable and has left me in a bind many times in work situations.

It is my sixth BlackBerry in two years, because BlackBerrys are an inferior product with the half-life of goldfish. A year ago today, I signed a new…

Reading the tea leaves
 
October Eonia is lower than the average for the previous two maintenance periods but it’s really difficult to separate the liquidity element [expectations of 12-month LTRO] from the interest-rate element.
 
In any case, if we take the view that there’s very little left to cut from the current 1.50% main rate as nominal at most, it doesn’t really matter whether we call the expectation hope of a rate cut, or hope for the widely expected ‘non-standard measures.’
 
As for October Sonia, it’s actually quite close to BOE’s key 0.50% interest rate and the quote for later months, are lower.
 
 No one is expecting a rate cut from the BOE and again its difficult to price expectation of QE because the curve is flat - Sonia forwards are little changed from Feb 2012 to November 2012

Fed Chairman Bernanke gave a curious and worrying signal in his appearance yesterday before the Joint Economic Committee of Congress.

He said, in the Q&A session that followed his testimony, that the recovery was ‘close to faltering.’

This subtly contradicted what he said in his pre-written statement.

 In that, he noted GDP growth in 1H 2011 averaged less than 1% annualised, but “in the second half of the year seems likely to be more rapid than in the first half.”
 
Perhaps the most important thing to note: Mr. Bernanke talks of a faltering recovery in a fortnight when much of the most recent US data have been more positive than a month ago.
 
Next thing to remember - don’t generalize.
 
Instead, accumulate evidence, whilst keeping an open mind.
 
The next big economic data release - after payrolls coming in a day and a half - will be US 3Q GDP data.
 
Some recent good data which should feed into 3Q GDP:
 

• Personal consumption figures for July and August point to on-track demand and 1-2% annualised growth in 3Q.

• Net balance of international trade data for first two months of 3Q are strong

• Shipments of non-defence capital goods ex-aircraft were higher in July-August vs 2Q

 
 
Perhaps the Fed Chairman’s concern over growth is based on anecdotal reports from the central bank’s contacts in industry?
 
Well, the surest recent industrial data we had were in the September manufacturing ISM.
 
They were promising. But we perhaps should look lower down and note the sub-index for the backlog of orders plunged to 41.5. from 46.0.
 
That was the lowest reading for backlogs since April 2009.
 
We should bear in mind that Mr. Bernanke is probably also focused on potential banking troubles [who isn’t?]
 
In his testimony he referred to sovereign debt problems in Europe as “a significant source of stress in global financial markets.”

ThSM

http://youtu.be/sZrgxHvNNUc

The problem is, ‘more’ has been given, and yet ‘more’ still, and it has not proved to be enough, for markets or the real economy.

What you will not find this afternoon, is an economist or anyone attentive and informed in the market who does not expect an additional accommodation by the Federal Reserve at it’s post meeting announcement, coming at 1815 GMT/1415 EST.

That’s the majority view.

Not cast in stone, of course.
 
There appears to be still sufficient leeway, even after the soundings by Federal Open Market Committee members over the last several weeks, for a materially downgraded version of the widely held expectations to be realized.
 
Those widely held expectation for the sake of completeness, and briefly put:
 
Fed will extend the duration of its Treasury portfolio, buying longer-dated notes in exchange for front-end paper. This would be an “active twist” policy where the Fed sells front-end paper outright to fund long-end purchases rather than simply relying on proceeds from maturities.
 
A little drill-down:
 
A higher proportion of buying is most likely in the 25-30-year segment targeting benefit to mortgage holders.
 
That would flatten the fronts-30s curve and widen the back-end swap spreads, flattening the curve overall and a steeper swap spread curve.
 
So, if the above doesn’t transpire, naturally, disappointment will translate into some sort of ramp in yields - although given the wider environment, that outcome is more than ordinarily sensitive to the global picture. 
 
 As for how much the Fed might ‘twist’: estimates I’ve seen range between USD250 billion-to-USD600 billion but consensus seems to be nestling within USD400B-500B.
 
Again, the latter obviously has implications for the immediate and short-term dollar reaction to any material overshoot or undershoot of what looks like the main expectation.
 
It’s also worth bearing in mind that since 30-year yields have tanked that much more than 10yr recently, some very long-end buying might be a logical move.
 
The foregoing aside, as you know, the Main Game is not ‘if’ ‘twist’ will happen [with necessary provisos that it still might materially not match expecations] but rather ‘how’ to finesse the extremeties of probabilities and tail risk.
 
 So, let’s look at the former first.

 What if the Fed was more, not less aggressive than wide expectations?

The Fed could indeed make an announcement of new outright securities purchases, with a corresponding likely unequivocal boost on the dollar.

[QE3 - of course]:

It would have to be at least $600B - the same as QE2, and probably more – perhaps as much as $1tr.
 
But at this point, more outright QE would be an outright shock to most Fed watchers, I think.

There are likelier, non-twist tools in the kit.
 
A brief round-up of the least exotic:
 
Price level targeting – requires running an inflation rate above a “target rate” to boost nominal GDP.

But it can only realistically be achieved by outright QE, so presents the same issues as option one. It also brings in already ‘above target’ inflation.
 
Bond yield targeting – like twist, but adding a target for points along the yield curve – say 10Y yields at 1.5%, 30Y yields at 2.8%.

But analysts who do speculate about that last one also wonder about its efficacy.

OK, how about, the Fed could cut the interest rate it pays on reserves (“IOR”) from 25bp, to perhaps 12.5bp.

This might encourage funds held on the Fed’s current account to shift to lower-risk assets; but again - efficacy is difficult to predict.

At this point, I’m fairly sure that most of you would rather not read much more than that about this FOMC meeting [if you even made it to this part without clicking away.]

To me it makes sense to conclude that the biggest risk - and I don’t think it’s naive to say even this afternoon - ironically, is still disappointment.

Whilst the Fed could purchase almost $800B in the 5-15y sector in a twist, before hitting its own 70% limit; this is not 2010.
The US political atmosphere is different today, than it was then.

Today’s one includes, amongst other aspects, a sharper, more confrontational political focus on the Fed and even Bernanke himself which ought to be taken into consideration.

Further, lower US long-term yields could help neutralise some of the sting of the financial crisis, true.

And with a fall in mortgage costs, a reduction in recessionary consumer deleveraging and cash-hoarding would also be welcome.

If it happens.

But with borrowing costs already at record lows and negative equity, how much of a further advantage could yield shrinkage offer the consumer?

As for the markets, the risk of re-directed funds finding their way back into Treasurys, especially in the current environment, is clear enough.

Emerging market assets as yield plays are also potentially more tempting than the real economy.

So we could instead of stimulus be left with even more compressed yields and little in the way of growth.