US non-farm payrolls rose by 80,000 in October while the gain in August and September was revised up by 102,000. These numbers are consistent with the recent strength of withheld tax receipts – see previous post.

The Monster index of online vacancies, meanwhile, rose solidly in October (after adjusting for seasonal variation), suggesting a further employment increase into year-end. The Monster index rolled over well before the onset of the last recession in December 2007.

ECB exposure to Greece could spiral as political chaos accelerates capital flight from the country’s banking system and the Bank of Greece plugs the gap with “emergency liquidity assistance”. Some ECB officials may favour suspending Greek access to liquidity facilities to contain the ultimate loss to the Eurosystem.

The latest balance sheet statement on the Bank of Greece’s website refers to 31 August and shows liabilities to the Eurosystem of €110.0 billion. This represents money borrowed from other Eurozone central banks mainly for on-lending to Greek banks via standard repo operations and “emergency liquidity assistance” (ELA) against inferior collateral. Standard lending was €93.1 billion on 31 August while ELA was reportedly €6.4 billion as of that date.

Bank of Greece borrowing from the Eurosystem has probably expanded significantly since August as deposit outflows from the banking system have necessitated further ELA. Eurozone monetary statistics released last week show that Greek M3 deposits contracted by €5.6 billion in September while yesterday’s Financial Times referred to an estimated €10 billion outflow in October. The Eurosystem’s exposure to the Bank of Greece, therefore, may now be about €125 billion.

This exposure, of course, is additional to the estimated €45 billion of Greek government bonds bought under the ECB’s “securities markets programme”.

Greek M3 deposits stood at €187.0 billion at the end of September, of which €77.4 billion were overnight deposits. It is reasonable to expect a significant proportion of this instantly-accessible cash to leave the banking system amid current political chaos that has increased the probability of a disorderly Greek default and EMU exit. Eurosystem lending to the Bank of Greece, therefore, may soon surpass €150 billion if the ECB keeps the liquidity tap turned on.

Eurosystem lending is against collateral on which haircuts have been applied while the ECB’s purchases of Greek government bonds were made at a large discount to par. The mark-to-market value of these assets in the event of a disorderly EMU departure, however, would probably be no more than half of the current balance sheet amount. The Eurosystem, in other words, could suffer a loss of about €100 billion, assuming exposure of €200 billion (i.e. lending to the Bank of Greece of more than €150 billion plus bond purchases of €45 billion). This compares with capital and reserves of €81.5 billion but additional revaluation gains (on gold and foreign exchange) of €383.3 billion – convertible, presumably, into capital in an emergency.

What should the ECB do? Shutting down the Bank of Greece’s “poison pill” ELA operation would probably trigger an immediate banking system collapse and could be interpreted as de facto exclusion of Greece from monetary union. Keeping the tap on, however, would accommodate further capital flight, allowing Greek depositors to transfer their exposure to the Eurosystem and, by extension, tax-payers in other EMU countries.

Greece, of course, has an incentive to delay default while wealth-holders are still able to transfer their assets to safety, courtesy of the ECB.

ECB President Draghi faces an unenviable choice between current blame for pulling the plug on Greece and possible future blame for squandering the bank’s capital on a lost cause.

Last week’s post on Eurozone monetary trends attracted attention – including some hostility to the suggestion that a sharp fall in Portuguese real M1 deposits foreshadows a Greek-style economic slump.

Respondents argued that the decline in M1 (i.e. overnight) deposits is irrelevant because it reflects a switch into term accounts, i.e. the money has stayed within the Portuguese banking system.

It is true that broad money is holding up better than M1 but even real M3 deposits were down by 1.8% (not annualised) in the six months to September.

More importantly, real M1 is a much better leading indicator than M3. Across a range of countries, real M1 contracted ahead of the 2008-09 recession while real M3 did not. In Portugal, for example, real M3 deposit growth remained solidly positive during 2008 even as the economy slumped.

The rationale for the better forecasting performance of M1 is that consumers and firms shift funds into or out of cash and instant-access accounts before raising or lowering spending. The recent fall in M1 deposits may, as claimed, reflect a voluntary switch into term accounts. It still implies that the money won't be spent.
 
The suggestion of a rapidly-deteriorating economic outlook is supported by a collapse in the “earnings revisions ratio”, i.e. the net number of upgrades to company profits forecasts by equity analysts, expressed as a proportion of the number of estimates. (Revisions ratios correlate closely with purchasing managers’ new orders indices in countries for which the latter are available – not Portugal.) As the chart shows, the Portuguese ratio was below both the Greek level and its own 2008-09 trough in October. Spain and Italy, admittedly, are similarly weak, in contrast to Irish relative resilience.

US “withheld income and employment taxes”, adjusted for the number of working days and seasonal variation, rose sharply in October. The monthly numbers are highly volatile but this suggests strength in employee incomes, consistent with a respectable rise in payrolls in Friday’s report.

Previous posts have suggested that global economic momentum would revive from late 2011, based on monetary trends and the similarity of the current cycle to the late 1970s – see here and here. The risk, however, was that this pick-up would be snuffed out by a deepening Eurozone crisis.

The latter possibility remains but manufacturing PMI data for October are mildly encouraging. The US, Japanese and Chinese new orders indices ticked up last month, with the former reaching its highest level since April. A slump in European activity, in other words, does not appear to be dragging down the rest of the world.


Other positive aspects of the US survey include a fall in inventories and sharp rise in order backlogs, suggesting that firms have been surprised by the strength of final demand.


The US / Japanese improvement dominated European weakness to produce a small rise in G7 weighted-average new orders. This had been foreshadowed by a recovery in Korean manufacturing expectations, which improved further last month – Korea’s export orientation and industrial structure make it a bellwether of the global cycle.


As previously discussed, the scenario of global momentum lift requires confirmation from the OECD’s leading indicator indices, suitably transformed. The next update is due in mid November.

On the initial estimate, UK GDP rose by a stronger-than-expected 0.5% between the second and third quarters. The monthly pattern of output, moreover, implies positive carry-over, reducing the risk of a contraction of GDP in the current quarter. The numbers, however, are of limited value because of their volatility and susceptibility to large revisions.

A monthly GDP series can be calculated from data on services, industrial and construction output, which account for 99.3% of the total. The monthly output numbers are available up to August and a September estimate can be backed out from the quarterly data in the GDP report. GDP appears to have risen strongly through the quarter, with the September level 0.8% above the quarter average – see chart.

This September excess implies, on the face of it, that GDP could fall by 1.0% by December – assuming that the decline is spread evenly across the three months – without the fourth quarter showing a contraction from the third.

The implied September GDP estimate is 1.0% higher than a year earlier while combined services and industrial output gained 1.6% over the 12 months, to stand “only” 2.3% below its level in the first quarter of 2008, when the recession began. These numbers accord with business surveys suggesting modest growth over the last year and contradict claims that the economy has been “flat-lining”.