What’s the Story Morning Glory?

by CC December 5, 2011 9:25 am • Commentary


The new euro package, as European and American officials describe it, is being negotiated along four main lines. It combines new promises of fiscal discipline that will be embedded in amendments to European treaties; a leveraging of the current bailout fund, the European Financial Stability Facility, to perhaps two or even three times its current balance; a tranche of money from the International Monetary Fund to augment the bailout fund; and quiet political cover for the European Central Bank to keep buying Italian and Spanish bonds aggressively in the interim, to ensure that those two countries — the third- and fourth-largest economies in the euro zone — are not driven into default by ruinous interest rates on their debt.


Italy’s Premier Mario Monti takes a package of austerity and growth-boosting measures to a skeptical Parliament on Monday as Europe enters a crucial week aimed at saving the euro.

Monti is to brief both Parliament chambers on the package, which includes €20 billion ($27 billion) of spending cuts and tax hikes, and €10 billion of measures to boost Italy’s anemic growth.

His government agreed Sunday to slap taxes on property and luxury goods, increase the age at which retirees can draw pensions, trim the cost of Italy’s political class and give incentives to companies that hire women and young workers.

While the package was passed as a government decree, Parliament must approve it.


Since peaking at about 7.33% on November 25, well into the danger zone above 7%, beyond which it becomes difficult, if not impossible, for Italy to service its debt, Italy’s 10-year bond yield has plunged to less than 6.1% this morning. Losing a full percentage point in yield is a huge move, and it has happened quickly.

It gained that full percentage point just as quickly, shooting from about 6.3% to about 7.3% in less than a week at the beginning of November, so it’s too early to sound the all-clear. Even at 6.1%, the yield is still painfully high.

But for now investors — and we’re talking about bond investors, who are presumably more sophisticated than stock investors or headline-driven trading algorithms — seem to be mostly satisfied with what Italy’s new technocratic leadership is doing. And they’re giving euro-zone policy makers the benefit of the doubt. So far.


The Institute for Supply Management’s services sector gauge is due for release at 10 a.m., with economists polled by MarketWatch expecting an improved reading of 54.0% from 52.9% in October. Also due for release is October factory orders, which may show a 0.4% decline.

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Monday’s economic calendar:
10:00 Factory Orders
10:00 Employment Trends Index
10:00 ISM Non-Manufacturing Index
1:10 PM Fed’s Evans: Economic Outlook