Economy Watch: Euro-Nervousness Ahead of Debt Sales

By Dees Stribling, Contributing Editor

Does the world have confidence in the euro on the eve of the next European Central Bank policy meeting on Thursday, along with debt sales by two of the sick economies of the euro zone, Italy and Spain, on the same day? Not so much. The 17-nation currency dropped on Wednesday by 0.4 percent, to a 16-month against the U.S. dollar.

Currently the ECB’s key interest rate is 1 percent, and most economists in a Bloomberg News survey considered it unlikely that the (sort of) central bank will make any changes to the rate, though a minority opinion holds that the ECB might shave off 25 basis points. More attention is probably being paid to how much investor demand there will be for Italian and Spanish debt. Italy seeks to sell 12 billion euros ($15.2 billion) worth of debt, while Spain only wants to sell 5 billion euros ($6.3 billion).

While investors may or may not want to make a contrarian play when it comes to euro-denominated debt (except for Germany’s), they’re snapping up another country’s debt, even though it’s known for its debt problems as well: U.S. debt, that is. On Wednesday, 10-year Treasuries stood at 1.911 percent, not an all-time low, but still in the lower reaches. Considering the relatively good economic news lately, one might expect yields to rise, but investors might still be looking for that safe haven as they worry about euro problems.

Beige Book offers a bit of cheer

The Federal Reserve published its latest “Summary of Commentary on Current Economic Conditions by Federal Reserve District” on Wednesday, nicknamed the Beige Book. This edition was a little more optimistic than other recent ones, reflecting a bit of the recent cheer about the economy, though the Fed never really gets too visibly excited about anything.

“Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most districts highlighting more favorable conditions than identified in reports from the late spring through early fall,” the Beige Book noted. “Upward price pressures and price increases remained quite limited for most categories of final goods and services … Upward wage pressures were modest overall, although a few districts noted substantial compensation increases for workers with specialized skills in selected sectors and regions.”

As for real estate, the Fed observed that activity in residential real estate markets largely held steady at very low levels, with the exception of increases in the construction of multifamily residences. “Demand for nonresidential real estate remained somewhat soft overall but improved in a number of districts,” the Fed said. Demand for office space hasn’t increased in most places, but “New York reported that demand for office space ‘picked up in late 2011.’ ”

Wall Street was indecisive on Wednesday, apparently unfazed by the fate of the Twinkie and Wonder Bread, with the Dow Jones Industrial Average losing 13.02 points, or 0.1 percent. The S&P 500 advanced a microscopic 0.03 percent, and the Nasdaq was up 0.31 percent.