Referendum moved to December 4^th

The emergency meeting in Cannes yesterday did little to comfort the markets as it became clear that a) Europe has no ability to discourage Greece from the referendum and b) that there is no plan B if Greeks reject the deal. Greek PM merely moved the date of the vote from early next year to 4^th December to soothe anger of European leaders. However, a month for the markets might turn into eternity especially if polls continue to show a high likelihood of a rejection. It is still uncertain if Greece receives the 6^th tranche of aid before the vote. On one hand there were voices that all aid will be frozen. On the other, (assuming Greece will run out of money by mid-November) it seems unlikely that Europe allows for a default just days ahead of the vote. For now, however, it is a large cloud of uncertainty and it seems that another G20 summit (which was about to convince BRICs to invest in EFSF) will end fruitless. 

The Fed still optimistic on growth

The Fed did not surprise yesterday as it did not change policy parameters although there was one dovish turn with Charles Evans voting for another expansion already in November. That vote goes against the forecasts presented by the Fed. Surely, the situation deteriorated markedly since June but a reduction in growth forecasts for 2012 (from 3,3-3,7 to 2,5-2,9) is moderate. The Fed still assumes the obstacles to growth are temporary and it will resume soon, exceeding a potential growth rate slightly next year and exceeding the market consensus of less than 2%.

Those forecasts are a bit inconsistent though. The Fed sees growth picking up decisively with monetary policy extremely lax for another 2 years and core inflation contained well below 2%. That’s a rosy picture but we think it will need to be adjusted either by lowering growth rate (more likely) or increasing inflation. For now, however, those bullish projections mean there should be no major expansion in the near period.

A cut yes, but later

A monetary expansion is much more likely in the euro zone as the European economy is slowing down and a risk of a recession is growing. Under normal circumstances there would be no reason to wait but circumstances are not normal. The new ECB president does not want to reverse course (rates were  increased as recently as July) so soon to be tagged a dove, but probably the decision to cut will not wait long. The mid-term interest rate perspective is clearly negative for the euro.

markets.

Przemysław Kwiecień PhD, Chief Economist

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