This morning has seen one of my recent themes continue to rumble around markets. The effect of the likely fiscal expansionism from President Trump that I discussed on the 9th of this month has continued for the US bond market. This morning we have seen a big figure change as the US Long Bond ( 30 year) yield has nudged over 3%. If we go back to the 9th it was doing this.
There has been a clear market adjustment to this which is that the 30 year ( long bond) yield has risen by 0.12% to 2.75%.
This has a clear economic impact as some US fixed-rate mortgages in essence track this rate so we will see higher quotes for them. Other US yields have risen too and this has driven yields abroad higher as well as for example the 30 year yield in Germany hit 1%. If we look at the UK there has been quite a change of tone for the UK Gilt market as Micheal Hewson has pointed out.
UK Gilt yields now at pre Brexit levels 1.433%
He means the benchmark 10 year Gilt. This leaves Bank of England Chief Economist Andy Haldane in something of a quandary as you see he promised a “sledgehammer” of monetary action but instead has spent some £33 billion on QE (Quantitative Easing) Gilt purchases to find he has put the UK taxpayer on this.
We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride
No doubt Bank of England Governor Mark Carney will be along to explain how yet again Forward Guidance looks like one of the “cunning plans” so beloved of Baldick of the TV series Blackadder.
Pain for Portugal
Not much pain is to be seen in the media as I note today it is full of reports of Christiano Ronaldo’s 2 goal haul and penalty miss. But you see the bond market tantrum has meant that the ten-year yield in Portugal is now 3.67%. A while ago the financial media were very concerned about it passing 3% but now a fair bit higher number is mostly passing unnoticed! If we move to intra Euro issues then there is a significance in the fact that it is well over 3% higher than the same maturity of Germany ( 3.31%).
This yield is in spite of the fact that up to the end of last month the ECB had purchased some 22.9 billion Euros of Portuguese Government Bonds.
The National Debt
This is an issue for Portugal as the Bank of Portugal describes in its latest Monthly Bulletin.
At the end of the first half of 2016, the public debt-to-GDP ratio stood at 131.7 per cent (121.8 per cent of GDP, excluding central government deposits), after reaching 129 per cent at the end of 2015 (121.6 per cent of GDP, excluding central government deposits).
Remember when the Euro area established a ratio of 120% for this metric on the early days of the Greek crisis? They must have regretted that very much as Italy and Portugal cruised by it. It is also revealing when you get a different number which of course is always lower but means using a different set of rules to the benchmark! As ever the official view is that the number is about to fall and to 124.8% but even the Bank of Portugal calls that “particulaly demanding”.
If we look at the numbers in relative and indeed comparitive terms the deficit is not large. From the Bank of Portugal.
, the general government deficit stood at 2.8 per cent of GDP in the first half of 2016, compared with 4.6 per cent in the same period of the previous year.
The catch is that it comes on top of the national debt and worryingly not with the revenue growth hoped for.
In the first half of 2016 total revenue grew, yearon-year, by 1.7 per cent, which was significantly lower than the yearly projection (3.3 per cent),
Also you may note that Portugal is still under the Euro area austerity program at least implicitly and the switch to fiscal expansionism seems to have by-passed it.
This is a road which so often seems to start hopefully as Venture Beat illustrate here.
As Web Summit arrives in Lisbon, Portugal tries to seize its startup moment with $220 million fund
Let us hope so although the reports of this will not have helped much. From @InsurgentPT
Portugal organizes #WebSummit. Wi-fi connection fails in the first day. Investors might not be impressed
In a way it always seems to turn out like that as hopes fade and growth at best ends up of the order of 1% as this from the Bank of Portugal shows.
Projections for the Portuguese economy point to a deceleration in GDP, from 1.6 per cent in 2015 to 1.1 per cent in 2016.
It blames “idiosyncractic structural constraints” which is odd after all the reforms we were told ( Remarkable progress according to Mario Draghi) have happened isn’t it? Actually this is especially worrying for those who have proclaimed reform.
The pace of growth in economic
activity has stood below that of previous
business cycles, namely affected by high levels
of indebtedness in the public and private sectors,
adverse demographic developments and
a macroeconomic environment characterised
by relatively weak external demand dynamics.
So worse rather than better? This poses more than a few questions when we note that the Euro economic experience for Portugal has been dogged by slow economic economic and that is in the better times.
As we look for reasons some can be bad luck as for example there were times that the large Volkswagen plant in Portugal would only bring good economic news. But the problems of corruption and cronyism in the banking sector has not only affected the national debt as more and more bailout have taken place but it has left the banks unable to support economic growth. There is something of a trap here as the weak banks struggle with non-performing loans but not supporting the economy only leads to them being more of a problem. Also Portugal’s businesses are rather indebted according to the Economist.
Investment is being stifled by the weight of the corporate sector’s debt, which is close to 140% of GDP.
We need some nuance and sense of scale here as the bonds yields of today are nothing like the 17/18% seen in Portugal before it called for a bailout. But they do pose problems as the fiscal windfall from lower bond yields invariably gets spent which is awkward when it fades. Also what happened to the economic growth from the windfall? This is a familiar theme as remember when Novo Banco was translated as New Bank and then turned out to be “meet the new boss,same as the old boss”?
Novo Banco’s legacy assets, however, turned out to be worse than expected, making it virtually impossible that the lender will be sold for anywhere near the €4.9 billion ($5.46 billion) capital injection it received. ( Wall Street Journal)
There are five bids for it again as we wonder how much they will pay for a bank who has just made a profit but of only 3.7 million Euros.
On the other side of the ledger there have been gains in Portugal as for example the unemployment rate has fallen to 10.5%. If the Algarve Daily News is correct maybe it needs find a way of reducing the undergorund economy.
Portugal’s grey economy, the parallel under-the-counter trade in goods and services, remains buoyant, reaching over 27% of the nation’s Gross Domestic Product last year.
The un-taxed economy, which keeps many from poverty despite its illegality, is running at the highest percentage since 2010……Portugal leads many of its peers too as the OECD average grey economy is just 16.4% of GDP.
Wasn’t this supposed to be another example of reform? Against that even a Euro below 1.08 versus the US Dollar will not help that much.
Also let me give my best wishes to those on South Island in New Zealand after the weekend earthquake.