S&P warned on lower US rating

illustration: stock exchange on wall street

(15.07.2011) Standard & Poor's yesterday warned US that there is a least 50% chance that the triple-A rating will be reduced, while Obama had another unsuccessful meeting with leaders in the Congress. This afternoon the result stress test for 90 European banks will be released.

By Knut A. Magnussen, Senior Economist at DNB Markets

President Obama is still pushing the leaders in the Congress to agree on deal that includes a higher debt ceiling. Yesterday a deadline for a solution was scheduled to this weekend. However, the disagreement prevails. Republicans are against any tax hikes, even if Obama proposed to reduce the payrolls tax further in order to stimulate the economy.

The rating agency S&P yesterday followed Moody’s and warned that risk that the US top rating may be reduced has increased considerably, even if the debt ceiling is raised later in July.
Chinese authorities also urged US to implement a more investor friendly fiscal policy. In the light of these events markets were rather depressed yesterday, with stocks falling in the US and in Europe.     

The European leaders will not meet again today as there seems to be no agreement on the second Greek bail-out package. The new ECB chief Draghi and the Bundebank president Weidman both criticized the management of the debt crisis and the pressure on Merkel to find a solution is mounting.

Italy
yesterday managed to auction government bonds equal to 4.9 bill. Euro, but had to pay 4.93% - a percentage points more than in the previous auction. The Italian parliament will today accept the austerity measures and the finance minister suggests continuing with structural reforms such as privatisation.   

Eurozone inflation ended at 2.7% in June as indicated by the flash estimate. Still energy prices lift overall inflation, rising by more than 10%. Core inflation seems to have stabilized at around 1.5%. The ECB still reckon that the inflation risk in on the upside and will hardly change this view due to the inflation data for June.

The most important event today is the publication of the stress tests for 90 Europeans banks
, representing 65% of the banking sector. More banks participate than last year and only German bank has withdrawn from the test. The stress test has been carried out based on balance sheets from December 2010 over a two year time horizon. Key features of the stress test for 2011 include a new consistent capital benchmark of 5 per cent core tier 1. It is expected that around 10 banks (4 smaller Spanish banks and 3 Greek) will fail to pass the capital requirement in the adverse scenario.

US retail sales disappointed in June growing by only 0.1% (in nominal terms). Furthermore sales were lifted by higher car sales (up 0.8%) rebounding from the Japanese affected drop in May. Core sales (corrected for cars and building materials) only grew by 0.1% for the second month in a row. Details show that sales of furniture, sport equipment and electronics all fell the third month in a row. Adjusted for inflation sales were probably flat in June. Inflation is due today. Headline inflation is expected to grow by 0.1% (m/m) while core inflation will probably grow by 0.2% in June. Initial claims fell to 405.000 last week, a positive report.

Today industrial production will be published. A modest rebound is expected after two week months. Michigan consumer confidence is expected to improve somewhat in July despite the recent weakness in the stock market. A somewhat lower petrol price may lift the indicator.