– Banco de Portugal worries about stability
– Manufacturing PMIs today
Good morning. There have been more shock disclosures in the leaked US diplomatic memos. Prior to the general election, the governor of the Bank of England apparently felt the Tories were paying more attention to winning power than to sorting out the deficit. Perhaps the governor might now reflect on how things might have worked out had they prioritised differently (“Vote for four years of austerity, you know it makes sense”). Another missive from Grosvenor Square revealed the ambassador’s suspicion that bad weather this winter would seriously mess up road, rail and air travel, as it has every year since they invented the horse.
He also suspects that the EU will have to bail out the Portuguese government. He probably picked that one up from Carlos da Silva Costa at the Banco de Portugal. The governor of the Portuguese central bank clearly shares the opinion of Mervyn King that it is not inappropriate for someone in his position to comment on government policy. The opening sentence of the Bank’s Financial Stability Report, published yesterday, says; “The Portuguese financial system is facing several serious challenges… worsened, in the Portuguese case, by the need of adjustment of structural imbalances”. The gist of the Bank’s concern is that the country’s commercial banks are at risk and that “the risk will become intolerable if we do not see the implementation of measures that consolidate public finances in a credible and sustainable way”. Portuguese banks are now almost totally reliant on the European Central Bank (ECB) for their funding. That situation will not have been helped by Standard & Poor’s announcement yesterday that it might downgrade its A- rating for Portuguese government debt.
ECB president Jean-Claude Trichet is not entirely in step with his colleague. He told the European parliament yesterday that “I don’t believe that financial stability in the euro zone could really be called into question.” M. Trichet believes investors “are tending to underestimate the determination of governments”. John Lipsky of the International Monetary Fund also sees no reason for concern. Speaking of the euro he said “the value is solid and it seems broadly appropriate”. Whilst conceding that “sure, there are near-term concerns of one type or another,” he thinks “the notion that the euro is under threat is wildly exaggerated given what’s happening in markets”. So, nothing to see here. Move along now, move along.
Although investors are not quite so sanguine about the situation, neither have they been as dismissive of the euro over the last 24 hours. The currency is about a cent lower on the day against the US dollar but all that damage took place within an hour of London opening yesterday. The euro’s one-and-a-half yen loss took longer to happen but there, too, it has been steady since early Tuesday afternoon. It looks as though investors have decided to sit back and think about where to go next. Tomorrow’s ECB press conference will be an important factor in their considerations.
The economic data received more attention than usual yesterday. European employment data were weaker than expected, with unemployment down by only -9k in Germany and Euroland unemployment up from 10.0% to 10.1%. The Canadian dollar took a cent-and-a-half hit after figures showed the economy growing at an annual rate of 1.0% instead of the expected 1.5% in the third quarter. Translated into quarterly terms it meant 0.25% growth instead of 0.37%. In the States the Case-Shiller house price index went up by 0.6% in the year to September, the Chicago purchasing managers’ index (PMI) added two points to reach 62.5 and the Conference Board’s index of consumer confidence improved from 49.9 to 54.1. As with Canada, Australia’s gross domestic product grew by less than expected in the third quarter; 0.2% instead of the predicted 0.5%. The news cost the Aussie more than a cent at the time but it has since more than made up the loss. That was largely as a result of a stronger than expected manufacturing PMI from China; 55.2 after 54.7 a month earlier. (Rather confusing the situation was HSBC’s own China manufacturing PMI, released an hour and a half later; fortunately it, too, was up by half a point to 55.3.)
Ahead of London’s opening the pound did not suffer much after Nationwide reported a -0.3% fall for house prices in November. Nor did the euro see much benefit from a stronger than expected 2.3% increase for retail sales in October, perhaps because that still left them down by -0.7% compared with a year earlier.
Top billing for the rest of the day goes to the monthly manufacturing PMI shoot out (the services PMIs come on Friday). Analysts are predicting an improvement for Switzerland, unchanged figures for Italy, France, Germany and Euroland and declines for Britain and the United States. The US also chips in with ADP’s employment change number, non-farm productivity and construction spending.
After the euro’s pause for thought it is possible we could see a touch of retracement today. Anyone looking to sell Sterling against the euro can always justify it by reference to the Nationwide house price index and the manufacturing PMI could provide extra decision support this morning. But don’t tell that to any US ambassadors. If you happen to speak to one, don’t say anything.