European Double Dip Begins, As Continent Finds Its Monetary Policy At Mercy Of New York Fed
With everyone's attention focused squarely on Ireland and whether or not the country would be finally put out of its misery, one thing that most missed is that after today's release of subpar economic data, Europe has now entered a double dip. While this is not news to Zero Hedge readers, as we were confident this would happen when the EURUSD passed 1.30 for the first time several months ago, it may take others by surprise. Unfortunately Europe's troubles are only going to get worse. The only way to stimulate organic growth now, read create another export-led bounce, requires the devaluation of the euro. However, that would mean that the ECB would have to not only launch a comparable program to QE, which would paradoxically anger an inflation-weary Germany (whose economy would benefit the most from an export boom) but far more importantly, anger the New York Fed. And this Europe can not afford - keep in mind that in Europe's rickety financial structure in which a whole lot of countries are kept on life support, the ECB is only the second to last (and far less reliable) provider of resuscitation services. The last one is the New York Fed, which courtesy of its FX swap lines, now has infinite leverage over what happens in Europe. Should there be another crisis, and there will be, the Fed's generosity will be tested again. As will the IMF... to whose various credit lines America just happens to be the biggest sole contributor. There is a word for this type of arrangement: total leverage.
In exchange for all these assorted mechanisms that allow Europe to continue its failed EUR experiment, the Fed now is the ultimate dictator of European monetary policy. Therefore in the global race to the bottom, Europe is now guaranteed not to finish first as the Fed's tentacles have made sure that the quid pro quo arrangement is all too clear. Which simply means that the material drop in GDP will accelerate, as Europe finds itself with its monetary options cut off, even as America reaps the benefits of a weak dollar (if not vis-a-vis China, then certainly with regard to Europe).
Markit Economic Research summarizes today's barrage of very unpleasant European data best:
The Eurozone economic recovery lost momentum in Q3, as expected and in line with the earlier message from the PMI surveys. Gross domestic product rose 0.4% in the three months to September compared with a 1.0% rise in Q2. Further weakness looks likely in coming months, especially as domestic demand looks set to remain lacklustre in the face of financial market, international trade and political tensions.
Not just a payback from Q2 rebound
The 1.0% surging growth pace seen in the second quarter was clearly unsustainable for long, and was attributable to special factors, such as a rebound from bad-weather related disruption in Q1. However, it would be unwise to dismiss the Q3 slowdown as merely a normalisation or payback from the growth spurt earlier in the year. PMI data suggest that growth momentum continued to be lost at the start of the fourth quarter, taking the GDP quarterly growth rate down to 0.3%. (The Composite Output PMI covering manufacturing and services averaged 55.7 in Q3 but slipped to an eight-month low of 53.8 in October). With media headlines highlighting growing trade tensions, and the euro area's periphery back in crisis mode, the chances of growth slipping further in coming months are very high.
The region's recovery is also looking increasingly uneven. Back-slapping in Germany as GDP growth came in at an impressive 0.7% is going to sit very uncomfortably with the unexpected weakness seen in other countries, especially the contraction seen in the Netherlands and stagnation in Spain. With ECB rhetoric focusing on the removal of ultra loose policy at a time when peripheral economies are stalling or contracting, policy tensions are likely to add to the uncertainty and unrest in the region and darken the outlook.
Surprise fall in industry
While GDP growth was in line with expectations, euro area industrial production disappointed by a wide margin. Production fell 0.9% in September against expectations of a 0.3% rise.
The monthly data tend to be volatile, and the decline most likely overstates the extent to which the industrial sector weakened at the end of the third quarter. These data nonetheless add to the growing body of evidence which suggests that the industrial sector is expanding at a much weaker pace than earlier in the year. Looking at growth over the most recent three months, the rate of expansion has slowed to just 0.8%, down from a peak of 2.9% in the three months to May.
This is a major disappointment given that industry has been a key driver of growth earlier this year and raises questions about the resilience of the recovery. The fact that durable consumer goods showed the greatest decline (a 3% fall during the month) highlights the persistent weakness of domestic demand in the region as a whole, as households worry about austerity measures, job security and the growing financial crisis, which is going to remain an important drag on economic growth going forward.
So let's summarize this week's developments: China is overheating and will hike rates soon in an attempt to neutralize the madman's liquidity tsunami, Europe's sovereign crisis will soon take its next two casualties even as the continent no longer can rely on even pipe dreams of EURUSD parity, and most importantly, the self-fulfilling prophecy of POMO updays is now over....
One wonders what the InTrade odds of the GM IPO being pulled at this point are.
Full Markit Report link
h/t Frode Haukenes
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