Europe's Recessionary Collapse Beating Even Most Optimistic Expectations
There was some confusion as to why yesterday various Eurozone consumer confidence indices posted a surprising jump and beat expectations virtually across the board: turns out Europeans had an advance warning of today's horrendous economic data among which we learned that Eurozone October unemployment just hit a record 11.7%, up 0.1% from September (we are trying to get data if the Eurozone is gaming its unemployment number the way the US does by collapsing its labor participation rate), with Italy unemployment surging to 11.1% from 10.8%, on expectations of a 10.9% print, French consumer spending in October was down 0.2%, compared to an unchanged reading in September, but far more troubling was that German retail sales imploded at a rate of 2.8%, the biggest monthly collapse in 4 years, and worse than even the most bearish forecast. Do we hear "Sandy's fault."
As a reminder, there was a bevy of "optimistic" data released yesterday which was meant to give people the impression that Germany is getting better. It isn't: in fact it is getting dragged ever lower courtesy of the endless bailouts it is engaged in (and with the Bundestag set to vote in the 3rd Greek bailout momentarily, this will merely continue). But at least Mario Draghi earlier said that he believes a eurozone recovery is coming in H2 2013. No it isn't.
Finally, we learned that even more hard core core countries are starting to get dragged into Europe's neverending recession as Denmark Q3 GDP missed expectations of +0.3% wildly barely posting a 0.1% growth. Finally, Sweden threw some cold water on hopes that the ESM can recapitalize banks, after saying that Sweden would block the key permissive condition needed: a EU bank deal. Of course, Germany will continue saying "9."
Naturally, none of this bothers the crack FX trading team at the BIS who has done everything in its power to keep the EURUSD smack on top of 1.3000 so as to not give any impression that anything is out of control.
And a quick look out of Europe brings us to the Japanese endlessly hilarious Keynesian basket case, where the Manufacturing PMI just dropped to 46.5 in November, down from 46.9 in October, on a collapse in Export Orders to 45.1 from 46.7. CPI slowed to -0.4% (that's a negative) Y/Y, but at least the unemployment rate was flat at 4.2%. To paraphrase Chuckie Evans: ease until that hits Minus 5%.
A more complete event recap comes courtesy of DB's Jim Reid:
“No substantive progress”, “a step backward”, and “disappointing” were the words used from both sides of US politics to describe the state of fiscal cliff negotiations yesterday. Yet despite this, the S&P500 still managed to close 0.43% higher - although it did trade briefly in negative territory in the morning session before recovering to close near the day’s highs helped by comments from Democrat Senator Chuck Schumer, who insisted that there indeed had been progress in talks.
Markets may have also taken comfort in the fact that the Democrats had at least offered a deal of sorts to the Republicans yesterday. Tim Geithner reportedly proposed a deal involving $1.6trn of tax increases over 10 years, an immediate $50bn round of stimulus spending and the ability to unilaterally raise the US debt ceiling in return for $400bn of savings from entitlement programs (Washington Post). However the plan was quickly dismissed by Republicans as “not a serious proposal”.
Nevertheless, Asian markets have taken the lead from the stronger US close to trade firmer overnight. The Shanghai Composite is rallying 0.55% after closing lower in the last four consecutive sessions. Meanwhile while the Hang Seng (+0.50%), KOSPI (+0.2%) and ASX200 (+0.63%) are also trading firmer. The Nikkei is outperforming (+0.85%) after the Japanese government approved an additional JPY880bn of stimulus measures. Data showed that Japan’s consumer prices fell 0.4%yoy in October (in line with expectations) which was sufficiently weak to prompt the economy minister to say that he wants to work with the BoJ to end inflation – echoing recent calls from the opposition leader. The USDJPY is up 0.41% overnight off the back of the headlines, while the EURJPY is up 0.53% reaching its highest level in seven months (107.2).
Back in the US and away from the to and fro of ‘cliff speak’, yesterday’s economic data was generally on the better side. Pending home sales for October were up 5.2%mom (vs 1% expected) after the previous month’s number was revised up to 0.4%mom (from 0.3%). Initial jobless claims fell to 393k for the week to Nov 24th, largely reflecting the diminishing impact from Hurricane Sandy which caused a large increase in jobless claims during the first half of the month. The second estimate of Q3 GDP growth was revised up to 2.7% from 2.0% although the detail was a little disappointing with inventory build accounting for the bulk of the upward revision.
Given the decent gains in equities on Thursday, it was interesting to see US 10yr treasury yields continue to grind tighter for the fourth consecutive day (-1.4bp yesterday to close at 1.615%). The US CDX IG credit index slipped below 100 again (99.5bp, or -1.5bp on the day) and spent much of the day trading in a narrow range, failing to react to the “cliff on, cliff off” headlines. In other moves, Brent rallied 1.25% yesterday to close up for the first time in four sessions, while spot gold added 0.3%.
It was a relatively quiet day in Europe with much of the focus on the US. The Ekathimerini reported that a number of local bank executives have informed the Greek finance minister that they do not want their institutions to take part in the bond buyback scheme, potentially decreasing the scheme’s chances of succeeding.
In other headlines, November was the second busiest month on record for US high grade corporate debt issuance according to the IFR with the total amount raised breaching the $120bn mark. The US Congressional Budget Office said that Treasury could hold off on needing to raise the debt ceiling until mid-February or early at the latest. The Treasury has previously estimated that it would hit the debt ceiling by the end of the year.
Turning to the day ahead, in Europe we get an update on the Eurozone’s unemployment, together with German and French consumer spending reports. The Bundestag is expected to vote and approve Greece’s latest aid package. Over in the US, October’s consumer spending report is due, as is the Chicago PMI for November. President Obama hits the road today stopping at a number of manufacturers in Philadelphia to pitch his message on extending tax cuts for middle class families.
What other macro events are on the radar today? SocGen chimes in:
Optimism is attempting to take hold as the year-end approaches amid hopes for a favourable resolution to the fiscal cliff, for mid-December financial aid for Greece, and for a smooth turn of the year for Spain. European equity markets are close to 2012 highs, the EUR/USD is close to 1.30 and the 10Y Bonos/Bund spread has tightened from 456bp to 390bp since mid-November.
Careful though, economic indicators published today will highlight that the eurozone situation remains depressed. French household consumption is expected to drop and the unemployment rate in the eurozone is expected to increase. In the US, the industrial sector is showing signs of recovery: the Chicago PMI is expected to go back over 50 in November. Conversely, household consumption is in the spotlight: consumer spending is expected to be nil in October. We also note that the private spending component of Q3 GDP was revised down, from 2.0% to 1.4% yesterday.
Political factors or economic fundamentals: which will dominate between now and year-end? While the former are attempting to gain ground, the latter will limit the potential of any rally. Against this backdrop, we continue to recommend selling the EUR/USD on rebounds. This strategy can also be applied to the EUR/JPY, particularly as the exchange rate is close to over-bought territory, which is not the case for other EUR/G10 exchange rates. On rates, watch the 10Y Bonos/Bund spread: the 18 October low at 370bp is in the crosshairs.
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And now that you have read all of this, forget it all, and focus on any and all conflicting, confusing, and contradictory headlines out of America's political class about the Fiscal Cliff, which is increasingly looking like it will not be fixed until the due date for the debt ceiling deal, some time in March 2013.