Stefan Angele (pictured), head of investment management at Swiss & Global Asset Management, looks at this week’s economic developments in Germany, the US and the Euro zone.
US initial jobless claims fell to 343,000 in the week ended December 8. This reading was better than expected and in fact represents the lowest level of claims since October.
Over the last month, jobless claims dropped by a cumulative 108,000 after Hurricane Sandy led to a sharp surge of jobless claims and put into question the improving trend. Separate data showed that US retail sales rose by 0.3% m/m, with auto sales rising by 1.4% m/m in November.
The latest figures confirm the temporary effect of Hurricane Sandy and point to an ongoing improvement of the labour market. This may help to bolster consumer confidence, which is under pressure due to the growing uncertainty about the “fiscal cliff”.
Record-low borrowing costs led to a surge in mortgage applications in the US. According to the Mortgage Bankers Association, the number of mortgage applications increased by 6.2% w/w, measured by the association’s index. The average rate on a 30-year fixed loan dropped to 3.47%, the lowest since 1990. Borrowing costs on a 15-year fixed mortgage fell to 2.85% from 2.86%.
The ultra-low interest rates are making investments in real estate affordable again, lending further support to the stabilising housing market by attracting new investors. At first glance, everything appears to be working out fine.
However, do not forget that some years ago, a very similar situation ultimately created a huge bubble. In fact, the data demonstrates the flip side of financial repression: On the one hand, repression is negative for savers who are striving for yields, but on the other hand the underlying low interest rates provide an incentive for debtors to increase leverage. Is this the seed of the next crisis?
European Union finance ministers agreed to put the ECB in charge of banking supervision. The agreement paves the way for direct bailouts for banks through the firewall fund.
The new supervisory mechanism should be in place by March 2014. Until then, the European Stability Mechanism (ESM) with its €500bn can aid banks directly with ECB supervision.
The deal is a first step in the right direction. Yet, more needs to be agreed and implemented to alleviate the European crisis. It remains to be seen if finance ministers will use the same momentum when it comes to agreeing on the details.