After the drama surrounding the fiscal cliff (tax hikes and budget cuts that were scheduled to take effect in early 2013), the U.S. House of Representatives approved on Wednesday a bill that prevented the "fall off the cliff". We emphasize that the understandings between the Democrats and the Republicans prevented an immediate entry of the U.S. economy into recession and led to sharp increases in global stock markets immediately after the agreement announcement. However, it is important to remember that there is still much work to be done in order to solve the U.S. fiscal problem, since the agreement reached reveals several of problems.
The first problem is that spending cuts were postponed. Current agreement focuses mainly on taxes while tough government spending cuts decisions were postponed and U.S. leaders will need to discuss and solve the budget cuts in two months, since in early March lateral budget cuts of 110 billion Dollars will automatically take effect.
The second problem is that the "debt ceiling" was not raised. In a few weeks the U.S. government's debts would reach the limit allowed by U.S. law, $16.4 trillion, and the government won't have an option to continue raising money in the markets. We should note that the debate regarding raising the "debt ceiling" is expected to be severe. It is likely that the Republicans who "lost" the fight over the fiscal cliff exploit the "debt ceiling" issue to force further budget cuts on the Obama administration, especially in the medical insurance and social security programs. On the other hand, President Obama stated that the budget cuts will not be negotiated with the Republicans and in order to solve the "debt ceiling" he requires a tax reform rather than cuts.
The debate regarding raising the "debt ceiling" will be the fifth debate in the past two years concerning U.S. fiscal issues. In each of the latest discussions, policymakers reached a solution, though at the last minute.
Rating agencies reaction: after the agreement was reached, Moody's declared that further steps must be taken in order to keep the U.S credit rating at its current level. Moody's noted that "Our ratings stance is to wait and see what the outcome of all of this is in the next few months, before we make any decision on the rating outlook or the rating itself. This is an important step, but it is the first step only", and added that "a lack of further deficit reduction measures could affect the rating negatively". S&P noted that the deal reached does not affect the 'negative' credit rating outlook of the U.S., and policymakers have a lot of work on their hands.
Last week was characterized by the PMI (Purchasing Managers' Indices) published worldwide. The Global manufacturing PMI rose slightly in December to a level of 49.8. While the PMI indicates expectations for further industrial expansion in the U.S. and in China, in Europe and Japan it indicates expectations for further economic contraction. In addition to the PMI, we note below the main data released last week.
U.S.: most of the economic data published in the U.S in the past week were positive. The U.S. labor market data (NFP) for December indicated that the recruitment of workers in the private sector was not affected by the fiscal cliff concerns, as net funding in the private sector was relatively higher than expected. In addition, the number of orders to U.S. factories (excluding transportation) increased during the past three months at an annual rate of 9.9% (compared with an increase of only 1.2% last year), and the ISM Non-manufacturing increased sharply than expected to its highest level since February 2012.
Europe: economic data coming from the Eurozone continues to point the recession. The Eurozone final PMI estimate for the industrial sector indicated a slight decrease, to a level of 46.1. The corresponding index of the service sector actually increased relatively sharply in December to a level of 47.8 (vs. 46.7 in November), which supported an increase in the composite PMI of all sectors in the Eurozone to 47.2 (vs. 46.5 in November). Despite the increase, the weighted index continues to stay under the threshold of the 50 points for the 11th consecutive month, and its level indicates the expectations for further contraction of the economy in the Eurozone.
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The first problem is that spending cuts were postponed. Current agreement focuses mainly on taxes while tough government spending cuts decisions were postponed and U.S. leaders will need to discuss and solve the budget cuts in two months, since in early March lateral budget cuts of 110 billion Dollars will automatically take effect.
The second problem is that the "debt ceiling" was not raised. In a few weeks the U.S. government's debts would reach the limit allowed by U.S. law, $16.4 trillion, and the government won't have an option to continue raising money in the markets. We should note that the debate regarding raising the "debt ceiling" is expected to be severe. It is likely that the Republicans who "lost" the fight over the fiscal cliff exploit the "debt ceiling" issue to force further budget cuts on the Obama administration, especially in the medical insurance and social security programs. On the other hand, President Obama stated that the budget cuts will not be negotiated with the Republicans and in order to solve the "debt ceiling" he requires a tax reform rather than cuts.
The debate regarding raising the "debt ceiling" will be the fifth debate in the past two years concerning U.S. fiscal issues. In each of the latest discussions, policymakers reached a solution, though at the last minute.
Rating agencies reaction: after the agreement was reached, Moody's declared that further steps must be taken in order to keep the U.S credit rating at its current level. Moody's noted that "Our ratings stance is to wait and see what the outcome of all of this is in the next few months, before we make any decision on the rating outlook or the rating itself. This is an important step, but it is the first step only", and added that "a lack of further deficit reduction measures could affect the rating negatively". S&P noted that the deal reached does not affect the 'negative' credit rating outlook of the U.S., and policymakers have a lot of work on their hands.
Global Economy: improvement in U.S. & China, recession in Europe & Japan
Last week was characterized by the PMI (Purchasing Managers' Indices) published worldwide. The Global manufacturing PMI rose slightly in December to a level of 49.8. While the PMI indicates expectations for further industrial expansion in the U.S. and in China, in Europe and Japan it indicates expectations for further economic contraction. In addition to the PMI, we note below the main data released last week.
U.S.: most of the economic data published in the U.S in the past week were positive. The U.S. labor market data (NFP) for December indicated that the recruitment of workers in the private sector was not affected by the fiscal cliff concerns, as net funding in the private sector was relatively higher than expected. In addition, the number of orders to U.S. factories (excluding transportation) increased during the past three months at an annual rate of 9.9% (compared with an increase of only 1.2% last year), and the ISM Non-manufacturing increased sharply than expected to its highest level since February 2012.
Europe: economic data coming from the Eurozone continues to point the recession. The Eurozone final PMI estimate for the industrial sector indicated a slight decrease, to a level of 46.1. The corresponding index of the service sector actually increased relatively sharply in December to a level of 47.8 (vs. 46.7 in November), which supported an increase in the composite PMI of all sectors in the Eurozone to 47.2 (vs. 46.5 in November). Despite the increase, the weighted index continues to stay under the threshold of the 50 points for the 11th consecutive month, and its level indicates the expectations for further contraction of the economy in the Eurozone.
Economic releases and events of the week
A batch of important data will be published this week, such as:- Tuesday: Eurozone Consumer Confidence Indicator for December (expectations for no change) Eurozone Economic Sentiment Indicator for December (expectations for a slight increase), Eurozone Retail Sales for November and the Eurozone Unemployment rate (expectations for a slight increase to 11.8%)
- Wednesday: Germany Industrial Production for November
- Thursday: ECB interest rate decision (expectations for no change)
- Friday: November Trade Balance data for the US and China, China's inflation data (CPI, PPI)
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