The U.S. economy expanded by 1.5 percent during the second quarter, topping expecations for a 1.4 percent gain.
Revisions were also not as painful as many economists had expected, with the Bureau of Economic Analysis ultimately increasing its estimate for the first three months to a 2.0 percent gain.
Key Numbers:
GDP: +1.5%
Personal Consumption: +1.5%
Q1 GDP Revision: +2.0%
European stocks were choppy Friday and the euro was trading in the middle of its session range against the dollar after Germany’s Bundesbank said it remains opposed to further government bond purchases by the European Central Bank, pouring cold water on the ECB president’s strong pronouncements in defense of the euro on Thursday.
But markets were then left in limbo on unconfirmed reports that the European bailout fund and ECB are preparing coordinated action on markets to support Spain and Italy, according to French newspaper Le Monde.
Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion euros ($366 billion) if its borrowing costs remain unsustainably high, a euro zone official said.
Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain’s borrowing costs soared past 7.6 percent, the source said.
If needed, the money would come on top of the 100 billion euros already agreed to prop up Spain’s banking sector, stretching the euro zone’s resources to breaking point, and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc’s ESM bailout fund comes on line later this year.
JPM’s David Mackie has complied a list of possible actions, in descending order of likelihood as he sees it:
1. EFSF/ESM purchases in primary and secondary bond markets.
2. A reactivation of SMP program on the basis of constructive ambiguity.
3. A decline in the ECB’s interest rate corridor, pushing the deposit rate into negative territory.
4. More LTROs with significantly less aggressive collateral haircuts, with the financing rate linked to the pace of bank lending.
5. A precautionary credit line from the EFSF/ESM for Spain.
6. A statement removing perceived seniority of EFSF/ESM and ECB interventions.
7. A full EFSF/ESM bailout for Spain.
8. An ECB commitment to buy EFSF/ESM debt in the secondary markets.
9. Large scale asset purchases along the lines seen in the US and UK.
10. A reactivation of SMP program with yield targets for Spain and Italy.
11. ECB taking a write down on holdings of Greek debt to reinforce pari passu status of official interventions.
12. Giving the ESM a banking license.
Mackie reckons items one to eight are within the ECB’s comfort zone. The other four are either some way away or would only become options if the crisis significantly deteriorates.
But the idea of giving the ESM a banking license may never get into the central bank’s comfort zone, given the legal opinion it issued last year. He adds:
Of course, legal opinions can change, and maybe Nowotny was signalling that this is happening. But, as we have argued in recent weeks, policymakers do not need to give the ESM a banking license. ECB purchases of ESM debt in the secondary markets would be enough to help the ESM do more if needed.
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