With yesterday’s US House of Representatives move to temporarily extend the key payroll tax cut and other measures, the odds are rising that we ease quietly into the New Year, even if volatility may return quickly in January.
US House clears way for tax cut extension
The obstreperous US House of Representatives Republicans decided late yesterday that there was no further political capital to gain in continuing their objection to the Senate’s plan to extend the payroll tax cut that would have otherwise expired next week. It’s a mere two-month extension, however, so we can expect a fresh round of negotiations and legislative sausage-making already in the first weeks of the New Year. The two month extension includes the actually far more controversial extended unemployment benefits program and whether doctors will see Medicare payment for certain procedures cut by 27%. Those latter two issues will be critical for political jockeying ahead of the November 2 election.
Challenging Spanish budget deficit math
An entry over at MISH’s blog discusses the challenging Spanish deficit math, quoting original Spanish news sources. With core budget items supposedly off limits, it appears the Spanish government will need to pare some EUR 40 billion in spending from the remaining EUR 90 billion in budget expenditures to meet target if it is unwilling to raise taxes. The entry also discusses the possibility of hidden Spanish deficits and whether they might stay hidden in order to avoid further pressure on sovereign yields. Normally, one would expect a new government to immediately uncover as many mistakes from the previous regime as it can in order to avoid any of the blame for those mistakes. Other points of interest as PM Rajoy officially took office on Tuesday include his promises to force banks to admit the full extent of their real estate losses and whether employers and unions can agree to massive new reforms aimed at increasing job market flexibility or whether the government will be forced to step in.
US Data
The US data was rather weak today, including an ugly core capital goods orders number for November, though the October data was revised +0.9% higher. The Personal Spending and Income data was anaemic as well, so nothing to celebrate into the US session unless we get a blowout New Home Sales number. I wouldn’t care to venture a guess about today’s number other than to say that probability for an upside surprise is higher than usual as the NAHB survey has been moving stronger in recent months and has proven a leading indicator on housing related data in the past.
Looking ahead
Hardly any clever words to add here in terms of the immediate outlook – it appears that things are fairly quiet so far and the temporary extension of the US legislation sharply reduces the odds of significant volatility and may allow us to ease quietly into next year before possible fireworks return the following week. Next week, we have mostly second-tier data from the US, though there is an Italian debt auction on Thursday that may represent an event risk hurdle ahead of the New Year’s festivities of the following weekend.
Have a wonderful Christmas. I will return next Tuesday with a comment or two – but hopefully most of you won’t be around to read it and are away from the markets and enjoying a holiday and resting up for what will likely be a dramatic 2012.
By the way – an entertaining antidote to the entire exercise of prognosticating about the coming year can be found in Caroline Baum’s latest column Here’s Hoping for More Lousy Forecasts in 2012 in which she makes fund of many of the calls for 2011. Considering widespread pessimism about the coming year, let’s hope she’s right.
Economic Data Highlights
UK Nov. BBA Loans for House Purchase out at 34,738 vs. 35,400 expected and 35,196 in Oct.
UK Oct. Index of Services out at -0.7% MoM vs. -0.1% expected
US Nov. Durable Goods Orders out at +3.8% MoM and +0.3% ex Transportation vs. +2.2%/+0.4% expected, respectively
Canada Oct. GDP out at 0.0% MoM and +2.7% YoY vs. +0.1%/+2.7% expected, respectively and vs. +3.0% YoY in Sep.
US Nov. Capital Goods Orders Non-defense, ex-Aircraft out at -1.2% MoM vs. +1.0% expected
US Nov. Personal Income out at +0.1% MoM vs. +0.2% expected
US Nov. Personal Spending out at +0.1% MoM vs. +0.3% expected
US Nov. PCE Deflator out at +2.5% YoY vs. +2.7% expected and 2.7% in Oct.
US Nov. PCE Core out at +0.1% MoM and +1.7% YoY as expected and vs. +1.7% YoY in Oct.
Upcoming Economic Calendar Highlights (all times GMT)
US Nov. New Home Sales (1500)
UK Dec. Hometrack Housing Survey (Mon 0001)
Japan Nov. Corporate Service Price Index (Mon 2350)
Japan Dec. Small Business Confidence (Tue 0500)
John J Hardy
SAXO BANK