Important developments today:
1. Credit risk for European sovereigns, and commercial bank debt rises to fresh highs
2. European equity markets showed a certain degree of apathy to the plan announced by Mr. Obama last evening
Credit risk for European sovereigns, and commercial bank debt rises to fresh highs. The cost of protecting against default on European private financial sector-and government bonds surged to new record highs amid a deepening Greek debt crisis. Second quarter GDP growth for Greece announced yesterday (–7.3% (year-on-year)), fell well below expectations, in effect making implementation of the austerity program more difficult. The Markit i-Traxx Financial Index of credit-default swaps (CDS) on 25 European banks and insurers increased by 18 basis points (bps) to 282 bps; at the same time, Markit iTraxx Sov-X Western Europe Index of swaps on the debt of 15 countries rose 6 bps to 329 bps, according to JP Morgan Chase.
An increase in CDS spreads signals deterioration in investor perception of credit quality. Among troubled euro-zone economies, CDS spreads on Greece surged by 337 bps today to fresh highs of 3,363 bps—implying a likelihood of default within 5 years of 93%. Elsewhere, Portuguese CDS jumped 35 bps to 1,101 points, Irish CDS climbed 17 bps to 853 bps, and Italy’s CDS moved up by 20 bps to 454 bps, according to CMA.
European equity markets showed a certain degree of apathy to the plan announced by Mr. Obama last evening. President Obama proposes $450 billion in support of job creation. At a joint session of the U.S. Congress last night, President Obama challenged the legislature to pass a jobs plan heavily weighted toward tax cuts (to lure Republican support) and increased spending on infrastructure; support for stemming the surge in teacher layoffs by cash-strapped state and local governments; and a call for reduction in the payroll (social security) tax paid by employees and small business owners in half.
This “event” follows on the heels of the acrimonious debate over conditions for lifting the Treasury’s debt ceiling less-than a month ago. Politics is a key driver for this proposal, with momentum behind the 2012 elections building steam. But the proposal also reflects the view of many analysts and “man on the street” that austerity following the debt ceiling “debate” (and U.S. sovereign downgrade) is the “wrong thing to do at the wrong time”, with the economy softening further into stagnation. Stay tuned!
In OECD economic news: a key report covered the downward revision to Japan’s second quarter GDP growth, from -1.3% (saar) initially reported to -2.1%, on the back of weaker capital spending (private sector investment actually declined), while the extraordinary strength of the yen (¥75 per dollar in today’s trade) crimping exports and boosting imports to a degree—dampening growth from higher rates expected. This offers a less than hospitable environment into which to launch a 3rd reconstruction package, being proposed by new Prime Minister Yoshhiko Noda. Italy also revised second-quarter GDP gains lower on weak household demand and slower export gains. Growth registered 0.3% (saar) contrasted with initial estimates of 0.8%, further evidence of stagnation taking hold in Europe.
Among Emerging Markets
In East Asia and the Pacific, China's inflation rate retreated from a three-year peak, dropping from 6.5% in July (year-over-year) to 6.2% in August. A moderation in food prices, which climbed 13.4% in August compared to 14.8% in July, was largely responsible for the ease in domestic prices. While inflation still remains above the target 4% rate for the year, it appears that easing food prices, in concert with the central bank's efforts to tighten policy (notably to slow the expansion of credit), are having some effect.
In Central and Eastern Europe …Turkey's seasonally adjusted industrial production increased 2.7% in July (m/m), a strong outturn in line with median market expectations. Low interest rates have spurred domestic demand and credit growth in the economy, which the central bank hopes will minimize the impact on the Turkish domestic economy from a sharp slowdown in global economic activity.