A Man with Plan A, or a Man with a Plan?

• Autumn statement to count cost of weaker growth outlook on UK public finances.
• Euro area finance ministers meeting to progress governance and treaty changes.
• US payrolls and ISM indices to judge pace of Q4 expansion.

The importance of the ‘failed’ German Bund auction this week may have been exaggerated - 9 have failed this year alone. However, the rise in Bund yields and fall in the euro raises fears that capital is now seeking safety outside of the Euro area and not across it. Merkel, Sarkozy and Monti’s meeting this week stated that salvation is still sought through long-term fiscal integration and treaty change - the main focus for the 9 December Summit. As such, the coming week’s finance ministers meeting will be a prelude to that. Whether long-term governance changes would clear the way for a short-term relief package is
the key question. But with the ECB discussing 2 or 3 year LTROs, the distinction between its monetary support and QE is increasingly fading.

The impact of the Euro area crisis on the UK will be laid bare in Tuesday’s Autumn Statement. Growth projections are likely to be pared back sharply. Borrowing forecasts should thus rise markedly - our estimates suggesting deficits totalling nearly £200bn more than forecast in March before end-2015-16.  The Chancellor will also use the growth review to discuss boosting lending to SME’s - ‘credit easing’ - and private sector involvement in infrastructure projects.

In the US it is too early to judge the strength of the Thanksgiving shopping binge. The coming week sees both the ISM index and payrolls reports - both key barometers of activity. But political deadlock remains a key risk. Failure to extend the payroll tax break into 2012 could reverse signs of an otherwise firming recovery.

UK Autumn Statement: Tuesday’s Autumn Statement is likely to be an uncomfortable time for the Chancellor. We expect Mr Osborne to reaffirm his commitment to deficit reduction - plan A - and try and get on the front foot with details of plans for ‘credit easing’ and pension fund involvement in infrastructure projects. However, the main focus of the statement will be a likely reduction of growth forecasts and its impact on public borrowing. We expect the UK economy to skirt around recession next year and deliver growth far short of March’s 2012-13 forecast of 2.7%. The Chancellor is likely to show that the fiscal objective of balancing the cyclically adjusted current balance within five years is still on track. However, the headline deficit profile is likely to be significantly higher and we believe the government’s net debt objective is in danger of not being met. Higher deficits also mean greater sales of gilts. We do not think that the additional supply will fundamentally unsettle gilts (beyond a possible knee-jerk reaction). The prospect of the Bank of England buying the lion’s share of this additional supply provides a safety guide. But with government bond yields rising in several other European economies, the risks to
gilts are in plain view.

UK manufacturing PMI (Nov): The risks to the UK economy look set to be fleshed out with this month’s manufacturing PMI. European ‘flash’ estimates for  November and sharp declines in the equivalent CBI survey, including export orders reaching a near two-year low, point to a further decline in the UK PMI -  despite October’s steep drop. We forecast 46.9. This suggests contraction in manufacturing, highlighting that the worsening Euro area crisis has seen the  UK’s efforts to rebalance halt for now. UK GfK consumer confidence (Nov): While global concerns have weighed on the positive aspects of rebalancing, domestic pressures well be revised higher). The unemployment rate is expected to hold at 9%.

US/CH manufacturing PMIs (Nov): The worsening global tenor is likely to be reflected in global PMIs (US ISM) over the coming week. Global manufacturing PMIs fell last month as rising uncertainty saw customers draw on inventories. The sector has led the recovery from the financial crisis and is the most sensitive to changes in sentiment at the global level. Following the lead of the European ‘flash’ PMIs decline in November, we expect the Chinese reading to dip below the nominal boom/bust mark of 50 to 49.8. However, we forecast improvement in the US ISM to 51.5 (from 50.8) although warn that a sub-50 reading here could see a more acute market reaction.

EZ finance ministers meeting (Nov): The lack of progress on October’s EU summit measures has seen investor confidence and financing conditions deteriorate, culminating in Germany’s disappointing Bund auction and benchmark CDS indices for sovereign and bank bonds soaring to record highs. The pressure on policymakers, particularly in Germany and France, has multiplied as the possible options to end the intense uncertainty narrow. What is clear  is that much more than was suggested at last month’s summit is necessary. Proposals for changes to the EU treaty will be made in the coming days, with enshrining stronger governance the centrepiece. However, these changes will take time – which is in short supply – leaving the question of whether the ECB is needed to provide temporary support open. With that in mind, the euro area finance ministers meeting this week could be overshadowed. Still, abject failure to acknowledge investor concerns would only serve to heighten market tensions.

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