This document is being provided for the exclusive use of NICK FERRIS at BLOOMBERG/ 731 LEXINGTON 06.22.11 Economics WEDNESDAY Europe NEWS ANALYSIS & COMMENTARY BRIEF ECONOMIC CALENDAR Papandreou Wins Vote, Euro Falls, Fed Decision (LONDON TIME) ■ WHAT TO WATCH: The euro weakened against the dollar on concern Greek Prime Minister George Papandreou will EUROPEAN DAYBOOK: COUNTRY TIME EVENT SURVEY PRIOR fail to pass austerity measures even after winning last night’s Louisa Fahy confidence vote. European Commission President Jose FR 07:45 Own-Company Prod. Outlook - 11 Barroso said the result ``removes an element of uncertainty FR 07:45 Production Outlook Indicator - 15 from an already very difficult situation.’’ The IMF said Spain must step up efforts to reform its economy. The Bank of England publishes the min- FR 07:45 Business Conf. Indicator 106 107 utes of its last meeting. U.S. Federal Reserve decisions on rates, bond purchases. DE 08:00 Consumer Conf. Indicator -0.5 2.6 ■ ECONOMICS: Euro-Zone Industrial New Orders (MoM) April; est. 1 percent, 10 SP 08:00 Mortgages-capital loaned YoY - -0.343 a.m. Euro Zone Consumer Confidence June; est. -10.4 (prior -9.8), 3 p.m. BOE minutes 9.30 a.m. Bank of Portugal monthly statistical report, 11 a.m. Trichet, King SP 08:00 Mortgages on Houses YoY - -0.202 speak at ESRB press conference, 5.30 p.m.. SW 08:00 Consumer Confidence 17 17.9 ■ GOVERNMENT: Italy’s Berlusconi speaks in parliament on government’s reshuf- fle, 10 a.m. Merkel briefs Bundestag Europe Committee on EU summit, 10.30 a.m. SW 08:00 Manufacturing Confidence SA 9 11 ■ COMPANIES: European Securities and Markets Authority will recommend SW 08:00 Economic Tendency Survey 110.5 112.4 releasing bank stress-test results when markets are closed. NE 08:30 Consumer Confidence SA -12 -10 ■ MARKETS: China’s money-market rate climbed to the highest level in more than three years. South Korea’s won advanced to a six-week high. Treasury yields were SW 08:30 Unemployment Rate 0.077 0.079 within two basis points of a one-week high. The cost of protecting U.S. corporate NO 09:00 Unemployment rate(AKU) 0.033 0.033 bonds from default fell by the most in three months. PD 09:00 Retail Sales MoM -0.013 0.023 Spain at Risk of Contagion From Greece as Regional Debt Rises PD 09:00 Retail Sales YoY 0.131 0.186 PD 09:00 Unemployment Rate 0.121 0.126 3.0 SA 09:00 CPI (all items) MoM 0.003 0.003 Spain-German 10 Yr Sovereign SA 09:00 CPI (all items) YoY 0.044 0.042 2.5 Spread SI 09:00 Auto. COE Open Bid Cat A - 53390 2.0 TA 09:00 Unemployment Rate SA 0.043 0.0435 UK 09:30 Bank of England Minutes - - 1.5 EC 10:00 Ind. New Orders NSA YoY 0.14 0.141 1.0 EC 10:00 Ind. New Orders SA MoM 0.01 -0.018 SZ 10:00 Credit Suisse ZEW Svy. (Exp.) - -11.5 0.5 IR 11:00 Property Prices MoM - -0.01 0.0 Saul Doctor, research analyst at JPmorgan Source: Bloomberg Chase, talks with Tom Keene about Spain risks debt contagion as its regions struggle to contain borrowing. The spread between its European credit default 10-year sovereign bonds and German bunds rose to the highest since November. Demand for six-month Spanish bills fell a week after data showed the total debt of Spain’s 17 regions rose to a swaps in the light of the record 11.4 percent of GDP in the first quarter from 10.8 percent in the previous quarter. debt crisis. 1 2 3 4 5 6 7 8 9 10 This document is being provided for the exclusive use of NICK FERRIS at BLOOMBERG/ 731 LEXINGTON 06.22.11 ECONOMICS | European Edition 2 BIG PICTURE COMMENTARY BY daVID poweLL, BLOOMBERG economist Labor Markets Point to Sharp Divergence in ECB, Fed Interest-Rate Outlooks When Federal Reserve Chairman Ben Bernanke gives his second press Taylor Rule Suggests Euro Area Requires Two More Rate Increases conference this afternoon, his tone will 7 probably differ considerably from the 6 hawkish outlook delivered by Euro- 5 pean Central Bank President Jean- 4 Claude Trichet almost two weeks ago. The divergence may be largely 3 explained by the structure of the labor 2 markets in the two monetary jurisdic- 1 tions. The relevance of that difference Federal Funds Rate (%) 0 may decline in the future. Federal Funds Rate Prescribed by Taylor Rule (%) Taylor Rule models for the euro -1 ECB Refi Rate Rate Prescribed by Taylor Rule (%) area and the U.S. suggest the latter -2 needs about 225 basis points of ECB Refi Rate (%) -3 monetary stimulus more than the former. The difference is largely Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10 explained by the level of unemploy- Source: Bloomberg; San Francisco Federal Reserve Bank ment in the U.S. and Europe below which prices tend to rise — the non-accelerating inflation rate of Labor Market in Euro Area Has Less Slack Than in U.S. unemployment, or NAIRU. 6 The Organization for Economic 5 Cooperation and Development esti- Difference Between Unemployment Rate mates that rate to be 8.5 percent for 4 and NAIRU (U.S., %) the euro area and 5.4 percent for the U.S. The gap between those levels 3 Difference Between Unemployment Rate and the current rates of unemploy- 2 and NAIRU (Euro Area, %) ment, measures of spare capacity in those economies, stands at 1.4 per- 1 centage points for the euro area and 0 3.7 percentage points for the U.S. As a result, the ECB has less abil- -1 ity to stimulate the economy through -2 low interest rates than the Fed, even Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09 Jul-10 though unemployment in Europe at 9.9 percent is higher than in the U.S. Source: Bloomberg at 9.1 percent and core inflation at 1.5 percent is exactly the same in both monetary areas. This exercise words, signaled that the Govern- tors until the summer of 2012, about uses core inflation for both econo- ing Council will raise rates by 25 the same time that they expect a mies in line with the inputs used in a basis points in July. That suggests rise of the Federal Funds rate. recent study by Fernanda Nechio of the ECB will likely raise its main While a drop in the unemployment the San Francisco Federal Reserve. refinancing rate only once more this rates and/or a rise in the levels of The Taylor Rule suggests that the year, possibly in October, at Trichet’s core inflation in either the euro area U.S. central bank, unable to actu- last meeting before retirement. or the U.S., would signal that inter- ally lower its main policy rate to the Investors have largely priced in in- est rates need to be increased, a minus 0.5 percent level prescribed, terest-rate expectations for the next rise in the Fed’s forecast of the long- should leave borrowing costs un- nine to 12 months that are in line run rate of unemployment, another changed for the foreseeable future. with the signals being sent by the way of saying NAIRU, would signal The rule indicates that the ECB Taylor Rule. The interest-rate market the same thing. The longer the un- should raise its financing costs a fur- has priced in a pause from the ECB employment rate in the U.S. remains ther 50 basis points to 1.75 percent. after a third-quarter increase. The stubbornly high, the more likely that Trichet, using thinly veiled code next move isn’t expected by inves- outcome appears. 1 2 3 4 5 6 7 8 9 10 This document is being provided for the exclusive use of NICK FERRIS at BLOOMBERG/ 731 LEXINGTON 06.22.11 ECONOMICS | European Edition 3 FED WATCH COMMENTARY BY JOSEPH BRUSUELAS, BLOOMBERG Economist Fed May Explore Different Measures to Support Economic Growth Investors will be watching the FOMC statement and Federal 3.00 Fed Balance Sheet Reserve Chairman Ben Bernanke’s Fed Agency Debt Mortgage-Backed Securities Purchases Liquidity to Key Credit Markets post-statement press conference 2.50 Lending to Financial Institutions Long Term Treasury Purchases today for indications of what, if any, Traditional Security Holdings extra support the central bank is 2.00 prepared to offer the slowing U.S. economy as its second round of quantitative easing draws to a close. 1.50 Trillions A third round of asset purchases doesn’t appear to be in the cards. 1.00 Bernanke has gone out of his way to state that the hurdle to more Fed 0.50 purchases would be quite high. This doesn’t mean the central bank 0.00 is out of ammunition, even with the Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 federal funds rate essentially at zero. Source: Cleveland Fed, Bloomberg In fact, it has a number of options, most of which relate to its ability to Commercial, Industrial Lending Accelerates indirectly influence the direction of 60 interest rates, inflation expectations and economic activity. 30 Under normal conditions, the Fed influences the economy by chang- ing the overnight rate.