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Wrangling of debt limit continues

Republicans and Democrats continue to wrangle regarding raising the long-term debt limit. President Barack Obama called the Republicans in congress to increase the country’s debt limit without preconditions, and emphasized that another conflict regarding fiscal issues, may lead to an extreme response of the financial markets. In addition to that, Obama said that the Republicans shouldn’t expect a “ransom” in the form of spending cuts for their agreement to raise the debt limit. The White House stated that it has no backup plan to pay the government’s bills so the meaning of the congress not raising the debt limit is leading the nation into default. During the weekend, Republicans announced that on Wednesday they would vote for a temporary increase of the debt limit, and emphasized that raising the long-term debt limit would be possible only if the government performs an equivalent amount of spending cuts.

Rating agency Fitch has mentioned this week the importance it attributes to the way they handle the crisis. More they mentioned is that it seems like Washington elites haven’t yet learnedthe lesson of the last fight over the debt limit in August 2011, when the Republicans and Democrats hesitancy eventually damaged the business confidence.

Most of the data published this week was quite encouraging. The recovery trend in the real estate market continues, jobless claims fell sharply, and private consumption increased at a sharper rate than expected in December. Nevertheless, we negatively note the rising pessimism reflected by the expectation surveys regarding the future of the American industry and the drop recorded in the Consumer Confidence Index.

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Regarding U.S. monetary policy, Fed Chairman Ben Bernanke spoke at the University of Michigan and did not say that the Fed intends to terminate or slow down bond purchases. Bernanke emphasized that the double role given to the Fed (stabilizing inflationary pressures while supporting the labor market) justifies using aggressive monetary measures.

Economic data from Europe and China

Europe: Eurozone economic data point to the contraction of the European GDP in the fourth quarter. A third consecutive monthly decline was recorded in the volume of industrial production in the Eurozone, the German economy contracted by 0.5% in the fourth quarter, and the volume of bad debts in Spain keeps breaking the record. Positively, we’ll note the increase in the Eurozone’s exports in November (+0.8%). The relatively sharp appreciation of the Euro could harm the recovery of the European exports, as marked by the Eurogroup chairman, Jean-Claude Juncker, that the Euro currency is dangerously high. On the other hand, one of the ECB members said he believes the current level of the Euro is not expected to threaten the European economy.

China: the batch of data published over that past week indicates an increase in the rate of growth of the Chinese economy. GDP in the fourth quarter rose by 7.9% year over year, compared to expectations for +7.8%, and a growth of +7.4% in the third quarter. The recovery in the growth rate in the fourth quarter was driven by a jump in infrastructure spending by the government, which began to grow in mid-2012, when concerns regarding the depth of the economic slowdown started to grow. Exports stabilized towards the end of the year, and china’s large trade surpluses contributed to the positive momentum.

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Additional data released on Friday pointed to an increase of 20.6% in the investment in fixed assets in 2012, compared with an increase of 20.7% (annual rate) on the first 11 months of the year. The industrial production rose by 10.3% in December and retail sales rose by 15.2% in December, vs. 14.9% in November.

Economic releases and events of the week

Monday: Eurozone finance ministers Meet in Brussels.

Tuesday: EU-27 Finance ministers meet in Brussels, ZEW Germany Assessment of Current Situation for January, U.S. Existing Homes Sales December (both expected to slightly increase). Draghi speaks at in Frankfurt.

Wednesday: IMF to release world economic outlook update, Eurozone Consumer Confidence Indicator for January, expected to increase slightly.

Thursday: Preliminary manufacturing PMI for January in China, Eurozone PMI (expected to increase from 46.1 to 46.6), Eurozone Preliminary services PMI for January (expected to increase from 47.8 to 48.0).

Friday: Germany – IFO Business Climate for December, which examines the economic assessments of the business sector; current expectations are for a slight rise in business confidence.

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