January 15 2013

In the broadcast today: Will the JPY Finally Correct Its Losses? As Japan’s economy minister warns about the effects of excessive yen weakness, we examine the oversold conditions in a number of JPY currency pairs and explore the potential for a significant price correction of the yen’s losses against the USD and other major currencies, we analyze the latest trend developments in the USD/JPY currency pair, we note the EUR/USD pair’s test of an important support level, we keep an eye on the GBP/USD currency pair following the U.K. inflation report, we highlight the market’s reaction to the German GDP, the Euro-zone Trade Balance, the U.K. CPI, and the U.S. Retail Sales, we discuss new forecasts from JPMorgan Chase and Royal Bank of Scotland, and prepare for the trading session ahead.

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Germany’s GDP falls by 0.5% in last quarter of 2012 and 2013 growth forecast could be cut tomorrow. The German government expects economic growth of 0.4% in 2013, accelerating to 1.6% in 2014, an economy ministry official told Reuters on Tuesday…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: German economy shrinks” was written by Graeme Wearden, for guardian.co.uk on Tuesday 15th January 2013 14.32 UTC

2.32pm GMT

Bank of Portugal cuts GDP forecasts

The Bank of Portugal has, like the German government (see 10.14am), admitted that its GDP forecasts are too optimistic.

It now expects the Portuguese economy to shrink by 1.9%, not the 1.6% previously. It blamed “less favourable global growth” and slower export growth.

Like Berlin, it still hopes for a bounceback in 2014, and predicts growth of +1.6%. However, it also warned that any “additional austerity measures” might sink that.

1.52pm GMT

Photos: Ireland and Greece hang together

To mark Ireland assuming the Presidency of the EU every flag (bar one…. see below) of union has been erected along the river Liffey in Dublin. And look who are flying side-by-side…..

Henry McDonald explains:

Someone with a sense of humour has placed the Irish Tricolour right beside the Greek national flag. A case of Europe’s “poster child” alongside, at least in German eyes, the bad boys and girls of the EU!

In the background is the brutalist 80s construct, the Irish Central Bank which is the workplace of the Troika of the IMF, ECB and EU who make sure Irish fiscal policies are to the liking of the global financial system.’

One flag appears to have gone missing, though, the United Kingdom’s.

Henry adds:

And the one and only flag missing from along Dublin’s quays is none other than the Union Jack – an emblem much in the news north of the border where loyalists riot because it only flies on 18 designated days atop Belfast City Hall. Its absence here in Dublin will undoubtedly be duly noted in Northern Ireland!

Indeed! There’s been a lot of talk of Brexit, but it’s not actually happened….

12.35pm GMT

Fitch: Spanish and US ratings risk downgrade

Rating agency Fitch has issued warning blasts at the Spanish and US governments this morning.

On Spain, Fitch warned that the country could see its rating cut even if it manages to avoid seeking international help. The problem, explained Fitch’s David Riley, is that the Spanish economy is so weak.

If this time next year the expectation is for another 1.5 or 2 percent contraction in the economy and unemployment getting towards 30 percent, it’s very bad times.

Spain is currently in the curious position of not needing to seek a bailout because the European Central Bank has pledged to support it through unlimited bond purchases if called upon, thus pushing its bond yields down.

Riley, though, warned that this won’t be enough unless Spain’s economy improves (which reminds me of Mario Draghi’s comments last week that eurozone leaders must seize the opportunity presented by the current calm).

Fitch currently rates Spain just two notches above Junk, at BBB (with a negative rating), so a downgrade could cost the country its investment grade.

And on the US, Fitch warned that its credit rating (currently AAA) would be at risk if Washington politicians cannot reach an agreement on its debt ceiling.

Crucially, Fitch said that the rating could be cut even if America managed to keep meeting its obligations and avoided a default. Failure to hammer out a deal in time would be enough to possibly trigger a downgrade.

Here’s a flavour of the statement:

The U.S. ‘AAA’ status is underpinned by the country’s relative economic dynamism and potential, diminishing financial sector risks, respect for the rule of law and property rights, as well as the exceptional financing flexibility that accrues from the global benchmark status of U.S. Treasury securities and the dollar. These fundamental credit strengths are being eroded by the large, albeit steadily declining, structural budget deficit and high and rising public debt.

In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current Negative Outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted.

11.34am GMT

Mervyn King: Eurozone banking union isn’t enough

Sir Mervyn King, the governor of the Bank of England, has warned that Europe’s push towards banking union will not, on its own, save the eurozone.

Appearing with senior colleagues before the Treasury Committee, King warned that Europe will only be on really solid ground when it has found “a way of fixing the current account and trade deficits” within the single currency region.

King said:

Banking union is the answer [to the crisis] only in as much that it allows countries whose banks need refinancing to get their banks recapitalised by other members of the currency union.

King added that European Central Bank is not able to reshape the eurozone to guarantee its future:

It cannot…either move to a transfer union, or take effective measures to change the competitiveness of countries.

The Bank of England group also didn’t seem too impressed by Europe’s push towards banking union — there was a long pause after they were asked for views on it.

And Andrew Bailey, the executive director and managing director of the Prudential Business Unit, was blunt that the scheme needs to include full insurance for savers.

10.54am GMT

Irish government pushes for pay deal

Back to Ireland where, in a bid to drive down its huge national deficit, the Irish coalition government is seeking to save an extra one billion euros from its public sector.

This means reviewing its national wage agreement with public service unions hammered out in Dublin’s Croke Park stadium – the home of Gaelic sports in Ireland – back in 2010.

Henry McDonald writes:

The Fine Gael-Labour administration insists that will press ahead with cuts in public pay of up to 7% even if talks with the unions break down.
Unions are accusing the government of breaking the agreement which was meant to last until 2014. Some union leaders are predicting that the talks will fail because their membership won’t endorse changes to their pay and conditions, which they describe as “draconian”.

Admitting that the government faces union opposition to changing the agreement, Brendan Howlin, the Minister in charge of Public Expenditure and Reform in the Republic, has said “it won’t be an easy task to drill down the content and get to the detail in a limited time frame.”

Critics of the Croke Park deal claim that it has thrown tax payers’ money at a bloated public sector and protected civil servants from the chill winds of the recession in Ireland. They charge that there is no EU state that has so insulated its state employees, their pay and pensions from the age of austerity.

At the start of this year Irish’s deficit was still €14.9bn.

The Croke Park Agreement has bought industrial peace in Ireland but at an enormous cost to the public purse, Henry explains:

Signed between the trade union movement and the previous Fianna Fail led government it secured the following:

  • A freeze on strikes in the public sector.
  • A moratorium on compulsory lay offs in the state services.
  • Co-operation on finding efficiencies in the state run enterprises and the civil service.
  • No pay cuts.

So far, the Fine Gael-Labour coalition that replaced the last administration has honoured this deal with the unions.

10.39am GMT

Howard Archer of IHS Global Insight believes the rise in the eurozone trade surplus (see 10.31am) suggests its economy didn’t shrink as much as feared in the last quarter (despite Germany’s contraction).

This lifts hopes that improving global demand will help the Eurozone exit recession early on in 2013.

However, Eurozone exporters will be hoping that the euro does not make further gains after climbing to an 11-month high against the US dollar this week

10.31am GMT

Eurozone trade surplus grows

Better news for the eurozone – it posted a larger-than-expected trade surplus in November.

The euro area enjoyed a trade surplus of €13.7bn in November, compared with under €5bn a year ago. While imports were flat, exports were 5% higher.

We don’t have a breakdown by country for November….

… but for January-October, Germany posted a trade surplus of €158bn, up from €129bn in the same period in 2011. Italy, though, showed the biggest improvement – a surplus of €6.6bn from a deficit of €25.3bn the previous year.

10.14am GMT

Officials at Germany’s economy ministry have conceded that growth this year will be much lower than the 1% official target — less than half, in fact.

Reuters reports:

The German government expects economic growth of 0.4% in 2013, accelerating to 1.6% in 2014, an economy ministry official told Reuters on Tuesday.

Add this year’s +0.7% expansion, and you’re looking at three years of pretty low growth…

9.57am GMT

Spanish bond sale success (again)

Another successful bond sale for Spain — it’s Treasury department just sold almost €5.8bn (more than its maximum target) of short-term debt at much lower borrowing costs.

Here’s the details:

• €3.25bn of 12-month bills at an average yield (interest rate) of 1.472%, compared with 2.556% last month

• €2.51bn of 18-month bills at an average yield of 1.687%, down from 2.778%.

Further proof that traders are more confident about the eurozone….

…as is the latest survey from Bank of America/Merrill Lynch, which shows that optimism is racing ahead.

Updated at 9.59am GMT

9.49am GMT

Mary Robinson: Ireland can come through the crisis stronger

Over in Ireland Mary Robinson, the former Irish President and close colleague of Nelson Mandela, is trying to cheer recession stricken Ireland up by predicting the country will emerge stronger than ever from the crisis.

From Dublin, Henry McDonald reports:

“I think Ireland has benefited from a very tough lesson. We recognise that this is the toughest time we’ve been through in modern Ireland. It’s hurting people terribly, but we will come through stronger and I hope we will come through fairer, with a real sense of what Ireland itself can achieve,” Robinson stated.

The ex President acknowledged that Ireland was going through “another wave” of emigration but this could be used to the Republic’s advantage.

She told students at University College Galway that these emigrants “know that they want to come back and be more equipped for the modern Ireland”.

Robinson who is one of the so-called global ‘Elders’ along with Mandela added: “We need to be a country that these young people want to come back to and that’s the challenge for the rest of us.”

And here’s the raw facts: According to the Central Statistics Office in Dublin, 87,100 people left Ireland from April 2011-April 2012, a rise of 7,000 compared to the previous year.

9.34am GMT

In the UK, inflation came in at 2.7% (CPI) for the third month running, largely as expected. That’s the (joint) highest level since May.

Utility prices continued to drive the cost of living up – they rose by 3.9% year-on-year.

9.21am GMT

Some early reaction to the German GDP data from Twitter:

9.15am GMT

German GDP: What the analysts say

Economists say today’s German GDP data (see 8.34am) is disappointing, but not alarming, Here’s some early reaction (cribbed from Reuters):

Jörg Kramer of Commerzbank

The drop in equipment investment in 2012 draws attention. That is all the more significant that firms raised their exports again.

Obviously firms have held back because they are uncertain about the (euro zone) debt crisis. But this has clearly ebbed.

Jörg Zeuner of KFGW

German growth was well above the European average in 2012 despite a contraction in fourth-quarter economic output.

I expect a significant recovery in 2013 after a weak first quarter.

Andreas Schuele of Dekaban

Growth as low as 0.7 percent is, at first sight, disappointing… But if you take the tough environment in the euro zone and weakness in growth markets into account, one can be quite pleased after all.

9.00am GMT

A German government source has told Reuters that Angela Merkel’s cabinet will decide tomorrow whether to revise its forecast for 2013 GDP growth down from 1% (perhaps to the +0.5% that Handeslblett predicted this morning)

8.55am GMT

German GDP: the details

Here’s the details of how Germany’s economy performed in 2012, showing a sharp fall in investment – but decent growth in exports:

GDP: + 0.7%

  • Private consumption: +0.8%
  • Equipment investment: -4.4%
  • Building investment: -1.1%
  • Other investment: +3.2%
  • Exports: + 4.1%
  • Imports: 2.3%

8.34am GMT

German GDP data shows shrinking economy

Good morning, and welcome to another day of rolling coverage of events across the eurozone, and elsewhere in the world economy.

Germany’s economy has shrunk in the last quarter, according to new data that is likely to force the Berlin government to slash its economic growth forecasts for this year.

The German Statistics Office reported this morning that Germany’s economy contracted by 0.5% between October and December, as the financial crisis hit Eurozone’s powerhouse economy.

This means that Germany grew by just 0.7% during 2012, a sharp slowdown that does not bode well for 2013.

Economists had expected annual growth of 0.8%, so today’s number is slightly weaker. Even +0.8% would have meant “a significant contraction in Q4″. according to CMC’s Michael Hewson.

In 2011 Germany had expanded by 3%, while in 2010 it posted growth of 4.2% – the best results since East and West Germany were re-unified.

The data, just released, may deflate some of the optimism that has been flowing around the financial markets in recent weeks. Or investors may decide that it’s all history, and cling to their confidence that the crisis is abating.

The key question now is whether Germany’s government will slash its forecast for growth in 2013. It currently forecasts a 1% increase in GDP, but business newspaper Handeslblatt reports this morning that it will halve it, to just 0.5%.

Plausible, given the Bundesbank has already warned Germany would expand by a meagre 0.4% next year. But politically unpalatable.

I’ll be tracking the reaction to the German GDP data this morning. We also have new inflation due for the UK (9.30am GMT) and the eurozone (10am GMT), along with the latest political developments in Italy ahead of next month’s elections.

I’ll also have an eye on Greece, and Ireland where the government is trying to hammer out a national wage deal with its unions.

Updated at 8.49am GMT

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