Bond Outlook by bridport & cie, August 15 2012
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Bond Outlook by bridport & cie, August 15 2012

While markets and commentators are focusing on euro break up, the European functionaries and politicians, if they are working at all, are drawing up rules for the banking union.

The last few years have seen a lot of events and market movements in August, but this year, so far, there is an almost surreal quiet. Many commentators are now presuming a Euro break up and are discussing whether it will be orderly or not. In the meantime, if there is any work being done by the European functionaries and politicians, it is focused on the exact structure and responsibilities of the ECB-led banking union. We cannot but think of dogs barking while a caravan passes.


Are European leaders really ignoring the barking? Or are they working in secret towards an orderly exit of at least Greece? If they are, they are doing well to keep the secret. For the moment the news from “Brussels” is expressed in terms of “while the banking union takes shape, EU lawyers are defining the roles of the ECB and of the individual central banks”. After several months of keeping out of the fray, the UK appears to be exerting influence again to ensure that the proposed banking union be implemented across the full 27-country bloc, not just for the core Euro zone. Thus, UK politicians are pushing for a degree of bank supervisor responsibility to be delegated back from the ECB to national central banks. This reflects a view of the EU remaining more than the core Euro zone and continuing as an open and single market whether or not the single currency survives.


Our simple view that, for the Euro zone, it is federalisation or bust remains; however, it is still unclear in which direction the zone is moving. In simple terms European leaders are saying that it is the former, and they are moving towards it (albeit very slowly), while commentators and markets point to the latter. Investors have to hedge their bets as fiscal union may yet come off, leading to all the defensive positions being unwound.


Over two years ago we supposed that quantitative easing would do what it always had done historically: sow the seeds for inflation. We soon learned that we were wrong because the deflationary forces of a weak economy were stronger than the inflationary pressures of massive money supply. Paul Ryan was a bit slower catching on in making the same forecast a few weeks back, decidedly weakening his image as a good economist. There are those who suppose Romney has no ideas of his own and has handed the economics policy portfolio to Ryan. What a gift to the Democrats! Still, it at least gives the American people a clear choice.


China is slowing in terms of GDP growth and especially exports. Yet the question that arises is about the extent to which recent phenomenal GDP growth has been real – “real” in the sense of reflecting retail consumption (probably yes) and productive investment (very doubtful). The BBC has recently described huge “white elephant” building projects of entire cities, shopping malls, entertainment parks and even mock English villages. All that building activity has added to GDP, but while the buildings all stand empty, can such activity be said to have increased wealth?


China is at a new turning point, just as the leadership is changing. Pensions schemes are now the order of the day, and, who knows, China might actually respect its obligations as a member of the WTO, especially on intellectual property. It will be interesting to see how Russia fares inside the WTO from next week.


What a good thing the Standard Chartered case has been resolved. A New York versus the City war was the last thing financial markets needed.


United States


Prices for single-family homes jumped the most since 2006 as real estate markets stabilized. However, be cautious as the mortgage delinquency rate increased for the first time in a year. The share of home loans at least 30 days late rose to 7.58% in the second quarter from 7.4% in the previous three months. On the other side, retail sales rose 0.8% in July. The productivity of workers rebounded in the second quarter. Prices of goods imported unexpectedly fell in July for a fourth consecutive month, reflecting lower costs for fuel and food. The 0.6% drop in the import-price index followed a 2.4% decline in June.


Macro Focus

Euro Zone


Euro-Zone is approaching recession. The euro-area economy contracted 0.2% in the second quarter after the worsening debt crisis and tougher budget cuts forced six nations into recessions. While the ongoing recession mainly affected the Southern countries, Northern countries significantly slowed in Q2.


French industrial output stagnated and German industrial production fell 0.9 % from May. Spain’s June housing transactions fall 11.4% from year ago.


United Kingdom


Inflation unexpectedly accelerated in July as airfares increased and there was some unwinding of early summer discounting by clothing stores. Consumer prices rose 2.6% from a year earlier.


Bank of England cut forecasts for economic growth and said Britain’s recovery will be a “slow process.” Governor Mervyn King said the U.K. must press on with reforms to the banking industry.




The consumer confidence unexpectedly declined to minus 17 in July from minus 8.


The Swiss National Bank may act to stem what it called risks from “excessive credit growth”. Thomas Jordan’s fight to protect the Swiss economy is set to widen beyond currency markets and too- big-to fail risks as the central bank chairman considers how to curb the biggest real-estate boom in two decades.


International Trades


Market attention is focusing on international trading. Who are, if there are some, the winners of the new economic equilibrium? German, Italian, Portuguese and Netherland trade balances increase benefiting from the euro depreciation and from labour reforms, while China’s, France’s and United Kingdom’s trade deficit widened. China’s export growth YoY collapsed from 11.3% in June to 1.0% in July.

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