September 5, 2013
Five key dates heading into the backstretch of 2013
The U.S. economy is trundling forward, Europe appears set for a positive turnaround and China’s output slide is halting and possibly reversing.
We should be enthusiastic about the outlook, right? Since the summer of 2007, when the sub-prime mortgage fiasco caught the world unawares, the prevailing mood of politicians and citizens alike has switched from cautious optimism to one of abiding wariness.
Let me put it another way. Ranging from tsunami damage and other natural disasters through too-frequent ill-advised government policy initiatives, we’re now often caught watching for “the other shoe to drop”.
Stating the situation even more succinctly, if it’s not one darn thing, it’s another.
Now that we’re in the back half of 2013, what should we be paying particular attention to on the economic and political fronts? In keeping with my prevailing theme of “worry”, four key dates loom, with a fifth possibly hanging in the wings.
1) On September 22, German voters will go to the polls. The coalition government of Angela Merkel is expected to win re-election handily. If that turns out to be the case, then the future of the Euro-zone would seem to be more firmly assured.
Admittedly, a number of other nations, including Greece, Italy, Spain and Portugal, will continue to need help with their financial problems. If Ms. Merkel’s hand is strengthened in the upcoming vote, her options will widen accordingly.
The current solution of strict austerity is gradually being eased. A flare-up in debt problems between now and late September might complicate the election outcome. German voters are understandably annoyed about continually being asked to bail out their neighbours.
2) The next two-day meeting of the Federal Reserve’s Open Market Committee is scheduled for September 17-18. That’s when many analysts think the Fed will begin to “taper” its $80 billion in monthly bond purchases. The remaining meeting dates this year are October 29-30 and December 17-18. The sessions are always held on a Tuesday-Wednesday, with interest rate announcements on the second day.
The resulting reduction in monetary stimulus has already been largely taken into account by the stock markets. The federal funds rate will continue to stay in a record-low range of 0.00% to 0.25%, but other interest rates — for example, 10-year Treasury notes and long-term fixed mortgage rates — have already risen by more than a full percentage point.
To put that in perspective, a 1.00% climb in the loan cost for a $360,000 mortgage works out to an extra $300 charge per month. Renewal of such a mortgage will take a big chunk out of any consumer’s disposable income.
U.S. new home sales in July at 394,000 units (seasonally adjusted and annualized) were less buoyant than expected (i.e., -13.4% month-to-month). A continuation of so-so numbers in the all-important housing sector may cause a delay in the implementation of the Fed’s stimulus-withdrawal plans.
3) Under its current budgetary provisions, Washington is expected to run out of money in mid-October. There will soon be need for an agreement to increase the debt ceiling from its current level of $16.7 trillion.
Given the partisan nature of politics on Capitol Hill these days, there is the danger of a return to the kind of impasse that resulted in a lowering of the nation’s credit rating in August of 2011, although the financial mix is a little different this time around.
Washington has actually been able to stretch out its finances further than first expected. There have been two major contributing factors: a reduction in expenditures due to “sequestration” and greater than anticipated tax revenue as a result of a stronger economy.
The Republicans have indicated that their co-operation to help alleviate the nation’s purse-strings gridlock will come with a price. One area where they’d like to see a concession from the Democrats leads naturally into the next point.
4) President Barack Obama’s daily planner includes a notation to announce a decision on whether or not to approve TransCanada Corporation’s Keystone XL pipeline expansion by the end of this year. There is speculation the date for a “yea or nay” may be moved back even further. This would smack of deliberate stalling and would not augur well.
If Keystone XL receives a go-ahead, the future of Alberta’s energy patch brightens. If not, then the imperative to approve alternative pipeline routes to Canada’s Pacific and/or Atlantic coasts becomes more compelling. The volume of railway, truck and barge tanker traffic must also increase.
The Republicans are in favour of Keystone XL for its job-creating and energy security spin offs. Prodded by a militant environmental wing within his party, Mr. Obama has previously demonstrated a reluctance to view the project as a bargaining chip in his dealings with the GOP.
If Keystone XL is not given the green light, will that relegate it to the scrap heap? That’s a difficult question to answer. Maybe it can be resurrected after the mid-term elections in 2014. Or maybe it would be brought forward again when there is a change in the White House in 2016.
5) Prognostication is defined by unpredictability. Any number of factors might arise between now and year’s end to alter the outlook. But there is one final precarious path, with no clear date in mind — in fact, for which the element of surprise is a key factor — that warrants mention.
A considerable weight of analysis is indicating that the Assad regime in Syria has used chemical weaponry against its own people. The administration in Washington previously spelled out that such a misstep would cross a line in the sand calling for U.S. direct military intervention.
Secretary of State John Kerry appears to be preparing the world for this eventually. A one-off air strike — currently viewed as the most likely course of action — would emphatically prove that America is prepared to back up what it says it will do.
It would also serve as a warning to Syrian officials against a repetition of such a morally reprehensible act.
History has shown, however, that military action in the Middle East can too quickly lead to even greater instability and an escalating commitment. The implications most obviously play out in the price of oil.
North American consumers of late have been more relaxed about what they’re paying at the gas pump. If the price of oil skyrockets, this will greatly tighten constraints on spending and lead to lower global growth projections.