German Constitutional Court To Get into Mix

The G20 tried to paper over differences, but to little avail. The shift in the statement from the need for fiscal support for the fragile recoveries to the need for fiscal consolidation did not survive through the press conferences, which saw US Treasury Secretary Geithner call on Europe and Japan to boost domestic demand and not to count on exports and the stretched US consumer. The US and European proposal of a global tax on banks was defeated, but the UK’s Osborne seemed to suggest that maybe the UK will unilaterally try to implement it.

The German Constitutional Court is back in the thick of things. According to Der Spiegel, Germany’s high court may consider the guarantees under the EU/ECB/IMF Stability Mechanism. Ironically, today the Eurogroup of euro zone finance ministers is expected to give its formal approval for the special purpose vehicle which stands at the heart of the Stability Mechanism. It is not clear if the Constitutional Court would throw a wrench into the plans, but the risk is surely heightened. Moreover, it plays on fears of the disintegration of EMU. A piece in the UK Telegraph apparently says it could happen over the next five years, while the policy group CEBR says it could happen as early as this week.

While of course recognizing the pressure in the euro zone, we do not share that degree of pessimism. That said, the German Constitutional Court injects a new unknown into the mix.

The Bank of England meets this week and although the market consensus expects no change in policy, public opinion polls out of the weekend suggest people are losing confidence in officials’ ability to control prices. This sentiment appeared to be reflected in the Shadow MPC, where four of its 9 members voted in favor a 5-0 bp rate hike this week. Prime Minister Cameron has indicated that the government will make a pre-budget statement tomorrow on the spending review framework. Cameron has been quoted in the press acknowledging that the fiscal problem inherited from Labour is even worse than the coalition government thought and that the potential consequences are more critical. Cameron appears to be positioning for serious austerity measures and appears to hinting at a VAT increase and spending cuts concentrating in pay, benefits and pensions. Sterling briefly dipped below $1.4300 in Asia and rebounded above $1.45 in Europe. Initial resistance is pegged now in the $1.4550-80 area.

German manufacturing orders for April jumped an impressive 2.8%. The consensus had expected a 0.2% increase. The March series was revised up to 5.1% from 5.0%. Yet the details of the report illustrate the conflicting pressures at work. Domestic orders rose 2.9%. While this would seem to be a sign of strong domestic demand, recall that Germany exports about 40% of its GDP (roughly the same percentage as China). That means the domestic manufacturing orders may be to help service foreign demand. Foreign orders themselves were up 2.8%, but orders form within EMU fell 1% (non-EMU orders rose 5.5%). On one hand, today’s orders data suggests that the risk is on the upside of tomorrow’s report on April industrial production (news wire consensus is for a 0.7% increase).

Hungarian rhetoric which hit the markets before the weekend has calmed down considerably. The new government is expected to unveil a new economic plan tomorrow and that it is committed to previously agreed upon budget deficit target of 3.8% of GDP this year. Some news savings will have to be found. The deficit widened to HUF736.2 bln at the end of May from HUF637 bln at the end of April. Nearly 85% of this deficit target has been reached. Watch the press conference from the Prime Minister’s spokesperson Szijjarto around 12:00 GMT as a potential risk event. Comments from Moody’s and Fitch earlier today suggest that the government’s comments at the end of last week have no direct impact on Hungary’s credit ratings, there is concern about the fiscal outlook post-election. Moody’s in particular drew attention to the negative implication of higher interest rates and weaker currency that resulted from the government’s comments.