John Furlan's  Instablog

Chances for success of the new Greek aid deal and Eurozone austerity policies depend very heavily on stabilization of growth in the Eurozone and China economies.

Flash PMIs, widely watched leading economic indicators, for manufacturing in China and composite for the Eurozone both came in at 49.7.

While that's just below 50 indicating expansion, with headlines emphasizing Europe was worse than expected, markets' reactions today were muted, with China stocks up 0.9%, the U.S. 0.3%, and Europe -0.9%.

The GDP of China and the Eurozone grew 8.9% and -1.3% (saar) in the last quarter, markets' seem to hope for 8%-plus and a little below 0%, respectively, in the current quarter.

Draghi's ECB will announce the result of its second LTRO (Long-term Refinancing Operation for banks) on Feb 29, expected to be similar in size to the first announced on Dec 21 of 489 b euro, which triggered the current leg of the strong global rally in financial markets (see my Dec 22 "Draghi as Euro Santa Claus a Big Deal"), along with continued better-than-expected U.S. economic data.

My guess is that global policy makers seem to hope that economic confidence will be boosted by the current large global financial rally; a stabilization of growth in Europe and China; rising growth in the U.S., consensus currently 2.3% and 2.4% in the first two quarters; and what Merkel considers a credible plan to deal with Europe, with no increases in ESM-EFSF.

Presumably the hope is that rising confidence will then lead to a second half increase in global growth. That hope would then seem to show some "light at the end of the (austerity) tunnel," perhaps making those programs more politically palatable and sustainable.

Also presumably European policy makers know that they are in a race. For without some hope to "stay the (austerity) course," there may be continued political pushback against those programs, leading to renewed bouts of uncertainty. Signs of that are already appearing, e.g. in Greece and Portugal today.

The media constantly reported on the target of Greece debt to GDP of 120% in 2020, when Greece hasn't been able to hit its targets just months out for the past two years, with its GDP now -16% below peak. Without some signs of Eurozone growth, that's likely to continue to be the risk for Greece and other countries with debt/austerity programs.

One very obvious risk to the optimistic scenario would be a continued rise in the price of oil, currently $106. More generally, the threat of rising commodity inflation would impact the ability of emerging market economies to re-stimulate their economies.

In particular, China is currently walking a very fine line between stimulating, e.g. its second RRR cut, and continued restraint on property prices, with its last CPI of 4.5% a little worse than hoped for.

Left click on chart to enlarge.