Market Watch - Economic Overview

03 Oct 2012

There was minimal news flow in Europe compared to recent months, with no major policy announcements. The Troika (European Central Bank / International Monetary Fund / European Commission) wrapped up its visit to Greece to determine compliance with the bailout program. The Greek parliament needs to pass a package of budget and structural messages agreed with the Troika to receive the next tranche of funding worth €31.5 billion. Approval to release these funds is expected in mid-November.

The other focus in Europe remains if and when Spain will formally request a bailout from the European Financial Stability Facility / European Stability Mechanism, which would allow the European Central Bank to start buying Spanish government bonds. Prime Minister Rajoy has delayed asking for assistance thus far, stating to the Spanish parliament “sometimes the hardest decision is not to take any decision”.

There is support for a Spanish bailout from external parties. Such a move would demonstrate the full power of the mechanisms in place to assist indebted nations, particularly the European Central Bank’s new policy of Outright Monetary Transactions.

Spanish economic data continues to deteriorate, with the unemployment rate rising to 25.0% for the September quarter. GDP contracted by 0.3% per quarter and is running at an annual pace of -1.6%.
In the US, investors focused on the 6 November 2012 Presidential Election, but Hurricane Sandy increasingly dominated attention. The storm passed through the north-eastern states of the US, including New York. At this stage it is expected that Hurricane Sandy could detract anywhere from 0.2% to 0.7% from GDP in Q4, although the extent of the damage is still being assessed.

Economic data releases continued to show positive momentum in the US economy. Once again the housing market continued to show signs of recovery. Housing starts rose 15% in September to 872,000, the highest since July 2008. Both multi-family apartments and single dwellings contributed to the improvements. New home sales rose 5.7% per month and house prices are increasing at an annual pace of 4.8%. As a result, consumer confidence remains at reasonable levels.

An advanced reading of Q3 GDP was released. The US economy is growing at a seasonally-adjusted pace of 2.0% per year, which was higher than consensus expectations.