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As the single currency was preparing itself for another EU summit of disappointment, it seems that a rabbit may yet be pulled out of a hat.   Few details are available on what was hammered out between France and Germany yesterday, but we should find out more today.   Germany has said no further bail-out of Greece can occur without private sector bond-holders taking some of the pain, but up to now France had been standing firm, alongside the ECB, in insisting that Greece could not be allowed to default.  

Even ahead of the meeting, there was talk of a eurozone bank tax, designed to raise up to EUR 50bn, which in turn would be used to fund a buy-back of Greek debt.   There are a lot of details still to be thrashed out, not least the stance of the ECB which was reportedly present at yesterday’s meetings.   The euro is a touch firmer on the news, but it remains to be seen if there is any life in the rabbit and even if there is, if it can run.   Markets have experienced one too many false dawns when it comes to EU summits to jump the gun.

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Commentary

 

Further signs of China coming off the boil.  The first glimpse of Chinese activity in July has emerged in the form of the HSBC PMI data, which dipped below the 50.0 level to stand at 48.9.   There are a lot of these surveys, largely because of doubts about the reliability of the official data, so this release should be taken with some caution.   Nevertheless, it does fit with signs that the Chinese economy is slowing but, at a first glance, the fear from this release would be that it is slowing a bit too fast for comfort.   Stocks were lower today for the 4th consecutive session, with sentiment dented by further government efforts to curb property prices.

Sticking plaster at the ready for the US debt ceiling.  The latest on the debt ceiling saga is that President Obama has said that a short-term increase in the debt ceiling would be acceptable, so long as it was tied to a “firm commitment to something big” in terms of longer-term deficit cutting measures.   The reason is that there are doubts that the current proposal on the table may not be signed, sealed and delivered by the August 2nd deadline.   Such a deal would extend the stress and uncertainty for markets as there would still be a risk that the deal could fall before it was passed into law, at the same time that a temporary increase in the debt limit was in place.

The capacity to divide the UK’s MPC. The minutes of the July MPC meeting reflected the recent slowdown in activity, but the balance of dissenters remained unchanged; two members voting for an immediate rate increase of 25bp and Posen continuing to argue for more quantitative easing. In the discussion that followed it seems that the hawks, even though they acknowledged the recent soft-patch, feared that this would also impact supply conditions. In other words, more long-term unemployment and more factories closing down would mean that the overall potential of the economy is also reduced. It’s in this area that the main divisions appear to lie. On the other side, it’s also this spare capacity argument that is seen as the main downside risk by those wanting to keep rates steady, namely that: “demand growth would not be sufficiently strong to soak up the pool of spare capacity in the economy”. For both sides, the trouble is that spare capacity is notoriously difficult to measure, knowing both just how much there is at the present moment in time and also how it is likely to develop.

What ties the US and eurozone together.   There’s an interesting common theme in what we are seeing in the US on its debt limit negotiations and in the EU on the Greece issue, namely that both are going back to plans that were rejected out of hand a few months previously. For both, the trouble is that things have gotten that much worse in the interim.   The latest deal on the table in the US took as its starting point the recommendations from the bipartisan commission chaired by Simpson and Erskine. At the time, this was comprehensively kicked into the long grass. However, it appears that the group of six senators have taken it as the framework for the current proposal that has been tabled as a means of resolving the current deadlock on the debt ceiling negotiations. A lot of what they proposed was far-reaching and economically sound in terms of achieving a more sustainable debt path. Politically though, it was unpalatable, especially to Republicans who remains wedded to the notion of not increasing taxes. The common theme is that politicians are scuppering the process of achieving what’s needed in the long term. At one level, this should not surprise, given the short-term nature of the electoral process (especially in the US). However, on both sides of the Atlantic, the delay in implementing what is needed means the costs to both are that much greater.