Causation between the US economy and Europe's debt crisis might be different than we think
A thought has begun to evolve in my mind and that is the causation between the US economy and Europe's debt crisis. With the Long-Term Refinancing Operation progamme the imminent funding risk in the European banking system is substantially removed from 2012 therbey calming financial markets. For more thoughts on Europe and the LTRO see this
CNBC interview with J.P. Morgan Chase CEO Jamie Dimon.
Now, the LTRO programme has changed 2012 for good compared to how everyone viewed Europe in November 2011. Also the important forward looking indicators are showing stabilisation in Europe and thus the continent is likely escaping a deep recession in the exchange of a more mild one. More importantly the downturn in Europe has not materially impacted the strength of the US economy in the last two quarters and thus causality between the two objects (US economy and Europe's debt crisis) might be different to what we had previously thought.
The thinking has been that a recession or shock in Europe would threaten the US recovery but so far that has not been the case. Instead, a possible outcome might be that Europe sees zero growth but gets its sovereign debt rolled and banks get through 2012. In addition the US economy continues to grow and housing picks up surprising everyone as employment rises faster than we believe is in the making for 2012. This pickup in the US economy will then begin to materialise in the form of higher growth in emerging economies and eventually Europe is pulled out of its mess five minutes past twelve. This would set the stage for rising asset prices including modest gains in house prices leading to huge contraction in leverage ratios that ultimately will be self-reinforcing for credit formation and transmission in the economy.
US GDP to be the talking point as the weekend approaches
The mother of all economic data, US GDP is out today at 13:30 GMT and the advance figures on the fourth quarter are expected to expand to 3.0 percent QoQ annualised from 1.8 percent. Read more on US GDP in our
Macro Update.
Later, the University of Michigan's final confidence figure for January is expected (14:55 GMT) to be unchanged from the advance figure at 74.0.
Is the LTRO beginning to work in the long end of the yield curve?
While most European stock indices are flat the real action is in the bond market with yields on Spanish and Italian 10-year bonds falling 23 and 18 basis points respectively; the Italian 10-year bond yield is now below 6 percent again and Spain's is below 5 percent.
The European Central Bank'ss LTRO programme worked immediately in the short end of the sovereign yield curve pushing short-term interest rates down and the question has since remained, also noted by Mario Draghi at the latest ECB press conference, whether it would work on longer maturities. With the latest weeks' continuing downward pressure on long-term yields in specifically Spanish and Italian bonds it sure looks like pension and tax reforms in Italy combined with accommodation from the ECB is helping sovereign bond markets.
While we are talking about Spain and Italy it is frustrating to observe how the unemployment rate in Spain continues to climb in recent figures and is now standing at 22.9 percent.
Ford misses on earnings but beats on revenue; P&G disappoints on outlook
No taking a quick look at earnings. Ford missed earnings expectations but its revenue surprised so overall a mixed bag. The same goes for Procter & Gamble which beat earnings estimates but its outlook is weaker than anticipated. However, the company's CFO is out saying it expects hiring in 2012 and also sees higher dividends.
Next up is Chevron. Remember it warned a couple of weeks ago about substantially lowering earnings due to temporary disruptions in production.