France

The overnight macroeconomic news started early with China where the second, HSBC Manufacturing PMI declined from 51.6 to 50.4, below estimates of 50.5, yet another signal of a slowdown in the country (where one can argue the collapse in copper prices is having a far greater impact), and where the Composite closed down 0.17% after its Mayday holiday. China wasn't the only one: India dropped to 51.0 from 52.0 in March, and Taiwan dipped to 50.7 from 51.2, offset however by the bounce in South Korean PMI from 52.0 to 52.6, the best in two years (a number set to tumble as Abenomics steal SK's export thunder). The focus then shifted to Europe, where virtually everyone was once again in contraction mode, as German Mfg PMI declined from 49.0 to 48.1, the lowest since December, if a slight beat to expectations (while VDMA industry body said March Machine orders dropped 15% Y/Y so little optimism on the horizon), France rose modestly to 44.4 from already depressed levels of 44.0, Spain PMI also rose from 44.2 to 44.7, Italy PMI at 45.5 from 44.5, Poland at 46.9 from 48.0, a 45-month low. At least Greece seems to be doing "better" with the Mfg PMI "rising" to 45.0 from 42.1. Across the reports, the biggest decline was in input prices following the recent clobbering in commodities, which in turn is translating into price deflation.

While some might scoff, there appears little the European leaders will not swoop to when it comes to papering over cracks and changing rules, we suspect that when they find out that by the mere waive of the May Day holiday they could increase output across the euro area (the majority of which is on holiday today) by an impressive $22.9 billion. Germany and France alone lose $11 billion of output for this holiday, according to Bloomberg Briefs. So is the next 'growth-and-austerity' plan to ban public holidays and boost GDP...

The highlights from Bill Gross' monthly letter: "The past decade has proved that houses were merely homes and not ATM machines. They were not “good as money.” Likewise, the Fed’s modern day liquid wealth creations such as bonds and stocks may suffer a similar fate at a future bubbled price whether it be 1.50% for a 10-year Treasury or Dow 16,000.... if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced....  Current policies come with a cost even as they act to magically float asset prices higher, making many of them to appear “good as money”. And the take away: "PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate....a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing."

The next Great Depression is already happening - it just hasn't reached the United States yet.  Things in Europe just continue to get worse and worse, and yet most people in the United States still don't get it.  We have been warning that the next major wave of the ongoing economic collapse would begin in Europe, and that is exactly what is happening.  In fact, both Greece and Spain already have levels of unemployment that are greater than anything the U.S. experienced during the Great Depression of the 1930s. Pay close attention to what is happening over there, because it is coming here too.  A full-blown economic depression is raging across southern Europe and it is rapidly spreading into northern Europe.  Eventually it will spread to the rest of the globe as well. The U.S. economy has become a miserable junkie that is completely and totally addicted to reckless money printing and gigantic mountains of debt. If we stop printing money and going into unprecedented amounts of debt we are finished. If we continue printing money and going into unprecedented amounts of debt we are finished. Either way, this is all going to end very, very badly.

The weakness in economic data (not to be confused with the centrally-planned anachronism known as the "markets") started overnight when despite a surge in Japanese consumer spending (up 5.2% on expectations of 1.6%, the most in nine years) by those with access to the stock market and mostly of the "richer" variety, did not quite jive with a miss in retail sales, which actually missed estimates of dropping "only" -0.8%, instead declining -1.4%. As the FT reported what we said five months ago, "Four-fifths of Japanese households have never held any securities, and 88 per cent have never invested in a mutual fund, according to a survey last year by the Japan Securities Dealers Association." In other words any transient strength will be on the back of the Japanese "1%" - those where the "wealth effect" has had an impact and whose stock gains have offset the impact of non-core inflation. In other words, once the Yen's impact on the Nikkei225 tapers off (which means the USDJPY stops soaring), that will be it for even the transitory effects of Abenomics. Confirming this was Japanese Industrial production which also missed, rising by only 0.2%, on expectations of a 0.4% increase. But the biggest news of the night was European inflation data: the April Eurozone CPI reading at 1.2% on expectations of a 1.6% number, and down from 1.7%, which has now pretty much convinced all the analysts that a 25 bps cut in the ECB refi rate, if not deposit, is now merely a formality and will be announced following a unanimous decision.

• Gold Bears Defy Rally as Goldman Closes Short Wager (BBG)
• Still stuck on central-bank life support (Reuters)
• Ebbing Inflation Means More Easy Money (BBG)
• So much for socialist wealth redistribution then? François Hollande to woo French business with tax cut (FT)
• Billionaires Flee Havens as Trillions Pursued Offshore (BBG)
• Companies Feel Pinch on Sales in Europe (WSJ)
• Brussels plan will ‘kill off’ money funds (FT)
• Danes as Most-Indebted in World Resist Credit (BBG)
• Syria says prime minister survives Damascus bomb attack (Reuters)
• Syria: Al-Qaeda's battle for control of Assad's chemical weapons plant (Telegraph)
• Nokia Betting on $20 Handset as It Loses Ground on IPhone (BBG)
• Rapid rise of chat apps slims texting cash cow for mobile groups (FT)
• Calgary bitcoin exchange fighting bank backlash in Canada (Calgary Herald)

We have commented numerous times on the inexorable rise in Spanish non-performing loans (NPLs). Since the Spanish economy started to weaken at the end of 2006, NPLs have been rising sharply; but the subsequent collapse of the Spanish property market exacerbated the matter further, causing a spike in NPLs in 2007 and 2008. Since then, the Euro area crisis and subsequent sharp rise in unemployment have led NPLs at Spanish banks to make new record highs. However, they are not alone. Italian banks did not suffer a property market collapse and so the rise in NPLs started later than in Spain and was not as severe. However, as JPMorgan notes, the sharp rise in unemployment we have seen since mid 2011 has led to an acceleration in NPLs at Italian banks. What should be most worrying for incoming PM Letta, is that from the respective troughs for each country (the trough for Spain was a lot earlier than for Italy, about two years in actual fact), Italy is looking eerily similar. The rise in NPLs at Spanish banks over the past two years has had a lot to do with the recession and rise in unemployment. To the extent that Italian unemployment has only started to rise sharply a year and a half ago, the future path for NPLs at Italian banks looks set to follow that of Spain. So why aren't bond spreads blowing wider? Answer below...

There have been five developments over the weekend.  Which is noise and which the signal ? 

After reading the Spiegel article below, which reveals so much about German thinking, it becomes very clear that not only is Cyprus the "benchmark", but that the second some other PIIG country runs into trouble again, and its soaring non-performing loans inevitably demand a liability "resolution" a la Cyprus, it will be Germany once again at the helm, demanding more of the same equity, unsecured debt and ultimately depositor impairment. As the following punchline from Spiegel summarizes, "It would be more sensible -- and fairer -- for the crisis-ridden countries to exercise their own power to reduce their debts, namely by reaching for the assets of their citizens more than they have so far. As the most recent ECB study shows, there is certainly enough money available to do this." And that is the crux of the wealth-disparity demand of the European Disunion.

The financial sector added 38% to GDP, but the threat of the banking-data sharing agreement will cause clients to pull their money out...

It appears Chuck has finally met his match, and his name is Jamie...

German finance minister Schaeuble just explained, in a seeming effort to assuage rising fears that the one core nation left in Europe will choose the game-theoretically optimal first-defection wins strategy, that "Germany benefits from the Euro more than others." Indeed it does; as German firms are buying up strong competitors, clients or suppliers at a time when those companies are struggling to stay afloat through years of recession in their home markets and as shaky banks restrict access to credit. It appears that the slow-and-steady bloodless invasion of Europe can be summed up by the following virtuous circle of Germany's hidden strategy. Of course, as Schaeuble explained later in his missive, "it is nonsense" that Germany wants a German Europe and that the Euro exchange rates is "Okay" for Germany.

It is a convoluted world. The money rolls in from the Fed, the ECB and various European funds where money is pledged by each country and put up by none. Pledges, contingent liabilities, guarantees of bank debt are not counted but have not vanished and show up when the bills are due decreasing the assets of everyone.  The newly printed money must find a home and so supports the sovereign debt yields while costing each European government more in the process. Austerity fails, unemployment rises, economies decline, more taxes are applied and the use of newly printed money is the only thing that separates us from some sort of financial chaos. The differential between the European economies and the European markets increases and the actual losses increase. Print forever. Lies without end. Reality redefined.

"While I think this policy is fundamentally right, I think [austerity] has reached its limits," was EU President Barroso's firestarter comment yesterday. As the WSJ reports, the IMF also said last week that  the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing that its belt-tightening is holding back the global economic recovery and could end up being self-defeating. Of course, the beggars are once again trying to be choosers as Spain's de Guindos pushes his agenda along this 'growth vs austerity' path, "What we are going to do now is strike a better balance between deficit reduction and economic growth," but it is the bagholders (or money-men) of Europe that has the last word. As we noted yesterday, Merkel's expectations are no more money without ceding sovereignty, this morning it is German MPs who are up in arms as Nobert Barthle condemns Barroso's statements on austerity and Hans Michelbach flatly rejects this path of no resistance as it "undermines fiscal consolidation efforts." Perhaps the most clear message was from Volker Wissing who added, "demanding more money or time would send a 'fatal' signal to financial markets on reforms." With German PMIs so bad this morning, we are reminded of Bill Blain's comment, that ultimately growth is about confidence - and right now, Europe is a very unhappy place.

Yet another round of less than impressive macroeconomic data from China and Eurozone failed to deter equity bulls and heading into the North American crossover, stocks in Europe are seen higher, with tech and financials as best performers. The disappointing PMI data from Germany, where the Services component fell below the expansionary 50, underpins the view that the ECB will likely cut the benchmark interest rates next month and may even indicate that it is prepared to provide additional support via LTROs. As a result, the EONIA curve bull flattened and the 2/10s German spread flattened by almost 3bps to levels not seen since June 2012. In turn, Bund future hit YTD peak at 146.77 and the next technical level to note is 146.89, 1st June 2012 high. However it is worth noting that the upside traction is also being supported by large coupon payments and redemptions from France, the second highest net market inflow for 2013.