Sorry for the delay in posting. Today’s central bank action is the big news for the market. Did anyone think central banks would fail to provide swap lines to each other in the event of a credit crunch?

Europe appears to be edging forward, but it is not clear how far it is getting. The plan to lever up the EFSF is getting fleshed out but even if it makes EUR 1tr — something that Jean-Claude Juncker called in to question yesterday — there is a big question mark about whether it will actually work. It will be too small to provide a credible backstop for Italy; and it is hard to see how participation makes sense for any private-sector entity. Perhaps when we have more detail the plan might look better. Also in Europe, the long-speculated plan for the ECB to lend to Eurozone sovereigns via the IMF has been discussed by Eurozone finance ministers. To see this as a solution for Europe, one has to believe that the only things holding the ECB back from buying much more sovereign debt are formal legal constraints. I do not think that this is the case. Rather, the ECB is highly reluctant to buy the debt of distressed sovereigns and keen to ensure that austerity is imposed. I do think it will act to prevent a collapse (regardless of legal constraints) if necessary, but I do not see why it should suddenly embrace debt monetisation just because there is a wheeze to do it through the IMF. What is happening in Europe is that the ECB is forcing PIIGS governments to attempt deflation, and attempting to force core governments to finance them while they do so. The question at issue is simply the division between core governments and the ECB in providing that support, and PIIGS yields are rising as they argue over that question. This analysis implies that the euro will not collapse, but that there will be a serious and prolonged recession.

Talking of serious and prolonged recessions, George Osborne announced further austerity measures yesterday. The reason for this is that the OBR has downgraded its expectations for future growth in 2011, 2012 and 2013 from 1.7%, 2.5% and 3% respectively to 0.9%, 0.7% and 2.1% respectively. The OBR believes that rising commodity and food prices, combined with low income growth, have squeezed household spending, and that is the reason why growth is presently behind its 2011 forecast; its downgrades to future growth are the result of a combination of a reduction in its estimate of the output gap from 4.7% of GDP to 2.5% and a reduction in its expectations for productivity growth (based on weak productivity growth in the recovery so far). The new figures mean that GO would have been on course to miss his target of eliminating the structural deficit by 2015; even with his new cuts, he now plans to have it sheared (it is a wooly notion after all) to zero by the 2016-17 financial year. This is probably optimistic. The problem with trying to reduce the deficit/GDP ratio is that cutting the numerator tends to depress the growth of the denominator, so one misses one’s targets; this can become a vicious cycle where the denominator actually falls, and there is upward pressure on the numerator as result of automatic stabilisers. Britain is not in that situation yet, although unemployment has risen a little which presumably means rising benefit payments. I think it would be better to stimulate the denominator by raising the numerator. Also optimistic is the idea that the electorate will stand for years of grinding austerity. Labour will have a good chance of winning the next election — which is a good thing, because they might actually do something to get us out of this mess.

S&P downgraded some banks, because of a change in methodology. The market was initially displeased, but a change is methodology doesn’t tell you very much.


Case-Shiller -3.6% d.e.
CB consumer confidence 56, b.e. by a significant margin.
Japan manufacturing PMI 49.1.
Japan IP 2.4% b.e. Oct.
Japan housing starts -5.8% YOY Oct.
Japan average earnings 0.1% b.e. Oct.
Australia private capex 12.3% b.e. Q3. The mining boom continues.
German retail sales 0.7% b.e. Oct.
German unemployment -20k b.e. Oct.
French consumer spending 0% d.e. Oct.
Italian unemployment rose to 8.5% d.e. Oct.
Eurozone flash CPI 3% a.e. Nov.
Eurozone unemployment 10.3% d.e. Oct.

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Chicago PMI
Pending Home Sales
Beige Book
ADP employment change
Global PMI’s