- European Commission’s investment plan relies on major private sector participation
- ECB’s Constancio opens possibility of sovereign bond buys using capital key
- US data point to more moderate – but still above-trend growth in Q4
EC announces EUR ‘315 bn’ plan
Europe’s long-trailed effort to give investment a boost was announced yesterday. The headline figure for the scheme is EUR 315bn over three years, which would have a significant impact on investment and economic growth. However, it depends largely on private sector participation to get to that number and therefore there are question marks about whether the programme will have a big impact.
The scheme involves the setting up of a European Fund for Strategic Investments (EFSI). It will be set up as a partnership between the European Commission (EC) and European Investment Bank (EIB). The fund will kick off with just EUR 21bn, involving a EUR 16bn guarantee from the EC and EUR 5bn from the EIB. This initial amount appears likely to be used as a basis to raise EUR 63bn in the capital markets (in senior bonds, subordinated loans, equity and quasi equity). These funds are then used to finance investment projects in partnership with other investors. This means that the amount raised would eventually lead to five times the amount of funding for investment projects. The investment would be in a wide-range of projects, including infrastructure and SMEs.
ECB’s Constancio open to sovereign bond buys
ECB Vice President Vitor Constancio went further than he has gone before in signalling his openness to sovereign bond buys. In a speech in London, he said that “we expect that within the time of the programme, the adopted measures will lead the balance sheet to return to the size it had in early 2012…If not, we will have to consider buying other assets, including sovereign bonds in the secondary market, the bulkier and more liquid market of securities available. It would be a pure monetary policy decision, buying according to our capital key, within our mandate and our legal competence”. We think it is likely that the ECB will extend its asset purchases in the coming months. Our base case is that it will focus on agency debt and corporate bonds, but the chances that sovereign bonds will be included are clearly significant and have risen further. The December TLTRO outcome will be key in giving the ECB a steer in terms of how much more it needs to do.
Sluggish US business investment orders…
After sturdy business investment growth in the third quarter, capital goods orders slowed at the start of the fourth quarter. Non-defense capital goods orders excluding aircraft, a proxy for business spending plans, declined by 1.3% mom in October after a fall of 1.3% the previous month (revised from -1.7%). Shipments of non defense capital goods, which are used to calculate equipment spending in the GDP measurement, declined by 0.4% after increasing 0.4% the previous month. Meanwhile the headline durables goods orders increased by 0.4%, after it plummeted by 0.9% in September as a result of a boost in defense orders. It must be said that these numbers are very volatile.
…while US personal spending firm going into Q4
Personal spending rebounded in October, increasing by 0.2% after being flat in the previous month (revised from -0.2%). Low gasoline prices and a stronger labour market continue to support consumer spending. Meanwhile, the core personal consumption expenditure price index (core PCE), which is closely followed closely by the Fed, rose by 0.2% mom in October after increasing 0.1% mom the previous month. On a year on year basis the core PCE deflator rose by 1.6%, the highest since December 2012. We expect the economy to slow down a bit after the strong third quarter GDP growth estimate, but growth should remain above trend. Meanwhile, inflation is likely to remain below the Fed’s 2% target in coming months, but should rise towards those levels by the end of 2015.