Europe Returns To "Growth" After Record 6-Quarter Long "Double Dip" Recession; Depression Continues
The amusing news overnight was that following slightly better than expected Q2 GDP data out of Germany (0.7% vs 0.6% expected and up from 0.0%) and France (0.5% vs 0.2% expected and up from -0.2%), driven by consumer spending and industrial output, although investment dropped again, which meant that the Eurozone which posted a 0.3% growth in the quarter has "emerged" from its double dip recession. The most amusing thing is that on an annualized basis both Germany and France grew faster than the US in Q2. And they didn't even need to add iTunes song sales and underfunded liabilities to their GDP calculation - truly a miracle! Or perhaps to grow faster the US just needs higher taxes after all? Of course, with the all important loan creation to the private sector still at a record low, and with the ECB not injecting unsterilized credit, the European depression continues and this is merely an exercise in optics and an attempt to boost consumer confidence.
Don't buy the propaganda? You are not alone - even Goldman said to not take the data at face value: "The solid Q2 GDP print should not be taken at face value as it partly reflects a “statistical payback”. Moreover, the weakness in French investment spending is a reason for caution. More generally, the Euro area still has to cope with balance sheet adjustment required in both the private and public sectors, and continuing fiscal austerity will continue to weigh on demand for some time to come." We give Europe at most two quarters before the net foreign capital rotation fades and the continent reenters an unprecedented triple dip "recession."
More on the GDP breakdown from Goldman:
The country breakdown showed that outturns in Germany, France and Italy were all stronger than consensus expectations. Germany and France recorded robust positive growth in Q2, while Italy and Spain saw small declines (Chart 1):
- Germany: +0.7%qoq in Q2 after a flat reading in Q1 (revised down from +0.1%qoq). This was above the consensus expectation of a +0.6%qoq increase (GS: +0.8%qoq). The statistical office does not provide a breakdown by expenditure components (these will be released on August 23), but it suggested that domestic demand was the main driver of growth in Q2: private and public consumption rose on the quarter, and investment spending increased markedly – likely reflecting some "weather-related catch-up effects following the unusually long and cold winter". The contribution from net trade to Q2 GDP was moderate.
- France: +0.5%qoq in Q2 after -0.2%qoq in Q1, above expectations (Cons:+0.2%qoq; GS: +0.1%qoq). The breakdown by expenditure components shows that private consumption picked up markedly, rising 0.4%qoq after -0.1%qoq, and that public consumption continued to support activity (+0.5%qoq after +0.3%qoq). However, investment continued to decline, although at a slower pace than in Q1 (-0.5%qoq in Q1 after -1.0%qoq). Overall, the contribution of total domestic demand (excluding inventory changes) to GDP growth was solid, at +0.3pp. The net trade contribution to growth was flat, as imports offset a strong rebound in exports (+2.0%qoq, driven by a pick-up in transport materials). Changes to inventories pushed up French GDP growth by 0.2pp in Q2.
- Italy: -0.2%qoq in Q2 after -0.6% in Q1 (published on August 6). This was also above the consensus expectation of a 0.4%qoq decline (GS: -0.3%qoq). Italy’s national statistical office does not provide a breakdown of GDP with its preliminary estimate. A detailed breakdown of the data will not be available until September 10.
- Spain: -0.1%qoq in Q2 after -0.5%qoq in Q1 (published on July 30). The outturn was in line with consensus expectations. The preliminary data release provides no breakdown in terms of output by sector or by expenditure component. We will have a clearer idea of the underlying rate of contraction in Spain when we receive an expenditure breakdown on August 29.
Eurostat does not publish a GDP breakdown by demand component until its second estimate of GDP (published on September 5), making it difficult to assess at this point what drove underlying Euro area growth. However, based on the information from Germany and France, private and public consumption seem to be the main candidates.
In other words, it is unclear what is driving European growth. It just "is." Wake us if we have seen this move before time and time again.
The full overnight market recap via RanSquawk
- BoE MPC voted 9-0 to keep QE unchanged at GBP 375bln and 9-0 to keep interest rates unchanged at 0.50%, 8-1 for forward guidance. BoE's Weale wanted shorter time horizon for 2.5% CPI knock-out clause than 18-24 months.
- Eurozone GDP SA (Q2 A) Q/Q 0.3% vs. Exp. 0.2% (Prev. -0.2%, Rev. to -0.3%).
- 15 people killed after Egyptian security forces attack pro-Mursi Cairo protest camps.
In spite of the release of better than expected Eurozone based GDP reports, equities fluctuated between gains and losses, with Bunds also reversing the initial lower open as market participants sought value in fixed yielding assets following an aggressive sell off yesterday. As a result, the excessive rise in money market rates yesterday which saw the 1y/1y EONIA forward rate climb to 0.4860 - highest since late June, also encouraged profit taking related flows which in turn weighed on the EUR this morning. However more so it was the release of the BoE meeting minutes, where Martin Weale dissented and wanted a shorter time horizon for 2.5% CPI knock-out clause than the agreed 18-24 months that drove EUR lower. In turn, GBP was seen bid across the board, as the minutes were perceived to be more hawkish than expected. UK curve reversed some of the aggressive flattening which was evident following the QIR where Carney announced that the Bank is to implement forward guidance. Going forward, market participants will get to digest the release of the latest PPI report, as well as the weekly DoE Inventories data. Also of note, Macy’s and Cisco are due to report earnings today.
China plans faster capacity cuts even as economic activity slows, according to an official. The government will complete by the end of 2014 its overcapacity reduction plan for the 5 years through to 2015.
EU & UK Headlines
BoE MPC voted 9-0 to keep QE unchanged at GBP 375bln and 9-0 to keep interest rates unchanged at 0.50%, 8-1 for forward guidance.
- BoE's Weale wanted shorter time horizon for 2.5% CPI knock-out clause than 18-24 months.
- Most members think UK short-term market interest rates out of line with economic outlook, some do not.
- Some members still believe case for more QE compelling, but want to gauge impact of guidance before raising asset purchases.
UK ILO Unemployment Rate (Jun) 3M/3M 7.8% vs. Exp. 7.8% (Prev. 7.8%)
UK Jobless Claims Change (Jul) M/M -29.2k vs. Exp. -15.0k (Prev. -21.2k, Rev -29.4k)
Eurozone GDP SA (Q2 A) Q/Q 0.3% vs. Exp. 0.2% (Prev. -0.2%, Rev. to -0.3%)
German GDP GDP SA (Q2) Q/Q 0.7% vs. Exp 0.6% (Prev. 0.1%, Rev. 0.0%)
French GDP (Q2 P) Q/Q 0.5% vs. Exp. 0.2% (Prev. -0.2%)
German BDI Industry Federation cuts German 2013 growth forecast to 0.5% from 0.8%
Germany sells EUR 3.231bln 1.5% 2023, b/c 1.3 (Prev. 1.6) and avg. yield 1.80% (Prev. 1.57%), retention 19.23% (Prev. 20.25%) - Highest yield since February 2012.
Fed's Lockhart said QE taper possible at any of next three meetings; don't expect to have enough data by September to be able to lay out full phase out of asset purchase plan. Said decisions to reduce asset buys will be data dependent. He added that disconnect between steady payrolls growth and weak GDP contributes to lack of clarity in the data.
In spite of the release of better than expected Eurozone based GDP reports, equities fluctuated between gains and losses, with Bunds also reversing the initial lower open as market participants sought value plays following an aggressive sell off yesterday. FTSE-100 index underperformed its peers, largely due to the fact that a number of large cap stocks are were trading ex-dividend.
GBP was seen bid across the board, as the minutes from the most recent BoE meeting were perceived to be more hawkish than expected. UK curve reversed some of the aggressive flattening which was evident following the QIR where Carney announced that the Bank is to implement forward guidance. SNB's Zurbruegg said CHF cap will remain in place as long as necessary, that the worst has been avoided with CHF cap and further added that CHF remains at a high level.
A major US oil and gas trade group asked the Obama administration on Tuesday to ease the federal bio-fuel mandate for 2014, citing the potential for serious economic harm if ethanol targets exceed 10% of gasoline demand.
Pacific crude exports in Oct seen slightly lower than previous month. Exports of sweet crude and condensate from Australia, Papua New Guinea and East Timor will be down about one to one-and-a-half cargoes in October at 10.5 to 11, down from 12 in Sept as maintenance reduces supply, trade sources said on Wednesday.
Libya told its customers on Tuesday it could make no promises on crude deliveries next month as on-off strikes paralysed its major sea terminals. Labour unrest gripping Libya's oilfields and ports has cut output to the lowest since 2011 war. Some analysts say it is well below 500,000 bpd compared with 1.3mln bpd in June. This morning it was also reported that 15 people killed after Egyptian security forces attack pro-Mursi Cairo protest camps.
API US Crude Oil Inventories (Aug 9) W/W -990K vs. Prev. -3700K
- Cushing Crude Inventory (Aug 9) W/W -1400K vs. Prev. -2200K
- Gasoline Inventories (Aug 9) W/W 1700K vs. Prev. -971K
- Distillate Inventory (Aug 9) W/W 1100K vs. Prev. 1500K
Glencore Xstrata says H1 copper and gold output rose, zinc declined.
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Finally, as usual, the complete recap of the day's events comes from DB's Jim Reid
Over the last 24 hours we’ve seen a fairly sharp selloff in rates markets - off the back of stronger economic data and more taper-talk from the Fed - while equity and credit markets remained relatively resilient. In the core bond markets, 10 year yields saw a sharp increase including Bunds +11bp, Gilts +13bp and OATs +11bp. Across the Atlantic, 10yr USTs also saw a selloff (+10bp to 2.71%), where yields moved back up to near-two year highs. 10yr UST yields are now at the top of the recent 2.5% to 2.75% trading range while 2s/5s and 2s/30s curves continue to steepen. In EM sovereigns, Mexican rates were amongst the underperformers, with the continuing disappointment over the government’s oil market changes and a rally in the USD driving weakness in EM bonds.
Equities and credit on the other hand have been relatively resilient amid the back up in global rates. The Stoxx600 (+0.56%) recorded its 10th gain in the last twelve sessions on the back of gains in mining stocks and cyclicals. The better than expected ZEW survey also boosted equity market sentiment on the continent. The S&P500 (+0.28%) closed higher as Apple (+4.75%) moved sharply higher for the second day in a row after billionaire investor Carl Icahn tweeted that he had built a stake in the company. EM equities also fared strongly with the MSCI EM index up 0.85%. In credit, synthetic indices on both sides of the Atlantic closed marginally tighter on the day.
Much of the UST selloff yesterday came after the release of retail sales data for July. The headline number printed at 0.2%mom which was slightly below the
0.3% expected by the market. But DB’s economists point out that the weakness in the headline stemmed mostly from motor vehicle sales (-1.0% vs +2.9% previous). Indeed ex-autos, retail sales were up 0.5%mom versus consensus estimates of 0.4%. The details of the retail report were also fairly firm with most categories showing solid gains including food & beverage (+0.8% vs. +0.2%), health & personal care (+0.7% vs. +0.1%), clothing (+0.9% vs. unch.), sporting goods & hobbies (+1.0% vs. -0.1%) and bars & restaurants (+0.6% vs. -0.5%). On a more micro level, HK-listed company Li & Fung, which is described as the world’s largest supplier of clothes and toys to retailers mostly in the US, said that the outlook for the second half is solid and forecast that operating profit would expand by 3-4 times that of the first half of 2013 – perhaps a sign of stronger retail demand in the 2H.
Yesterday’s Fedspeak didn’t help the price action in USTs. Atlanta Fed President Dennis Lockhart indicated that the Fed may be ready to taper at any of their next few meetings. But his comments did contain a few dovish snippets including his comment that “a decision to proceed -- whether it is in September, October, or December -- ought to be thought of as a cautious first step”. Lockhart also said that he didn’t expect the Fed to have enough data by September to layout a full phase-out of QE. He also singled out the “uneven” performance of the US economy with steady payrolls data but weak GDP which is contributing to the “lack of clarity in the data”. Possibly contributing to the selloff in treasuries, a Bloomberg report suggested that supporters of Janet Yellen are outnumbered by supporters of Larry Summers among leading advisers to President Obama. The article said that the probability of Summers getting the Fed’s top job is 60%, Yellen is at 35% and others at just 5%.
Moving on overnight markets, 10-year government bond yields in Australia, New Zealand and South Korea are following the lead of their US/European counterparts and are up 9bp, 9bp and 5bp on the day as we type. JGBs are outperforming on a relative basis (+1bp to 0.75%) and USTs have unwound some of their losses from yesterday, trading 1bp firmer at 2.71% this morning. Regional credit markets are broadly unchanged. In equities, markets have been quiet with Hong Kong markets shut for the whole day due to a typhoon warning. As we go to print, the Nikkei is down 0.6% while the KOSPI and Shanghai Comp are 0.1% and 0.25% higher respectively. In further tentative signs of a recovery in activity in China, Chinese import iron ore prices at the port of Tianjin hit a five month high of $142/metric tonne yesterday. Other Chinese growth sensitive commodities such as copper and nickel are up 9% and 11% from the recent lows, respectively.
Turning to the day ahead, the focus on the Eurozone is on Q2 GDP numbers. Markets are expecting a 0.6% qoq number for Germany, 0.2% for France and 0.2% for the Eurozone as a whole. In the UK, the latest minutes from the BoE will be closely read following the introduction of the Bank’s forward guidance.The UK labour report is also scheduled today. The US data the PPI and mortgage applications are the highlights of today’s calendar.
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