FxPro Daily Forex Brief - Emerging easing
Thursday, 19 January 2012 | 11:00
No great surprise to see Brazil cutting rates by 50bp overnight (taking key rates to 10.5%), given that the latest GDP figures show the economy having ground to a halt in the third quarter of last year. This should also be seen in the context of the more fragile global environment. The Brazilian real has been one of the best performing of the majors so far this year and was only minimally dented by yesterday’s easing. Meanwhile in China the authorities are taking a different approach in the face of the softer (although still healthy) GDP data, relaxing lending conditions to the major banks and effectively ordering banks to front-load lending in the first half of the year. Both Brazil and more so China are testament to the greater policy flexibility in the face of global risks of emerging nations at this time. Meanwhile, as yesterday’s IMF announcement has shown, there are no easy roads for those who are facing larger problems, with monetary and fiscal policy routes largely blocked.
The impetus moves back to Washington. The IMF confirmed earlier speculation that it would seek to increase its lending capacity by a further USD 500bln (including the previous USD 200bln pledged by the EU), to cope with the implications of a worsening of conditions in Europe. The euro ended the morning session near the highs (above 1.28 on EUR/USD) on the back of the initial reports. We’ve been down this road of sanctioning greater involvement from the IMF before. The difference now appears to be that the IMF is looking to increase its resources so as to offer a buffer for the world economy against the impact of a worsening of events in Europe. The amounts in question are also more substantial, with talk of a USD 1trln overall lending capacity. Those nations with the capability to extend funding to the eurozone rescue vehicles are only likely to do so under the auspices of the IMF framework, which is infinitely more experienced and robust than those in place in Europe (EFSF turning into the ESM). So the fact that the IMF is seriously exploring this possibility is a positive development. However, there have already been signs of dissent, not least from the US which is the only country to singularly have the power to veto such an increase. It has its election coming up, whilst it and others still feel that Europe needs to do more to get its house in order. There are no easy roads.
Sagging UK labour market. Sifting through the details, the latest numbers confirm that the UK labour market remains in a fairly lacklustre state, something that is unlikely to change anytime soon. The private sector continues to create jobs, 262k in the year to September 2011, but this was more than offset by the fall in public sector jobs - down 276k. Overall employment remains 1.4% lower than the pre-recession peak of Q2 ‘08. The interesting story here is that this number would be lower were it not for the increase in self-employment, which is 7.4% higher vs. the start of the recession. A report released overnight by the Chartered Institute of Personnel and Development (CIPD) suggests much of this increase is down to the weakness of the market for permanent positions, meaning that people are looking for what work then can get and the majority are working less than 30 hours a week. The other notable factor in today’s numbers is the further moderation in the pace of total-pay growth. This is now increasing by less than 2% in annual terms, having been up nearer 3% earlier last year - the impact of lower bonus payments. The UK’s position, experiencing a weak labour market, is certainly not unique among the developed nations. However it is the impact of high inflation pushing down real-wage growth into negative territory that has been a defining factor. Whilst the fall in inflation (seen in yesterday’s figures) will provide some relief, if the trends in today’s numbers are continued, the impact could be weak as nominal pay growth moderates.
Rajoy rides to the rescue of the regions. Those cash-strapped regional governments in Spain have been thrown a lifeline by PM Rajoy. The new Budget Minister, Montoro, has announced a package of measures for the regions, including a credit line and various other liquidity provisions, in exchange for a commitment to tighter centralised control over fiscal deficits. Montoro wants to impose spending and debt caps on each of the regions for this year. In addition, the regions will receive a transfer of EUR 8bln which was due six months ago. Suppliers of goods and services to these municipals have not been paid for months so this is welcome news, as is the announcement that regional governments will be able to apply for loans from the Official Credit Institute. In Spain, more than 30% of all government spending is undertaken by these regional governments. Also, regional governments have been given an extra five years to pay off the EUR 140bln of collective debt they owe to the central government. Separately, Rajoy is also focusing closely on the parlous state of Spanish banks. In particular, he wants to force the banks to come clean on bad loans and to make more accurate provision for losses. He is working on a set of measures for the banking sector which he hopes will be ready by the middle of next month. Something obviously needs to be done – there was a huge drain of deposits from Spanish banks last year. For example, Banco Espanol de Credito SA, the retail arm of Banco Santander in Spain, recorded a decline in deposits last year of 15%.
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