Having recently pointed out Draghi's worst nightmare [7], we thought the anti-thesis of hope over reality that is occurring in European "markets" was worth pointing out. Spanish sovereign bond spreads have collapsed this week to their lowest (least risky) in 30 months at a mere 229bps. The total and utter disconnect of this supposed 'free market' based measure in the face of nothing but terrible Spanish data is entirely without precedent...
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Today's retail sales beat is the latest 'outlier' being heralded as supporting the disconnect - of course, that is until seasonal adjustments remove all the gains and reality sets back in.
While many expect Spain to emerge from recession in Q3 2013 (and we assume that is the 'hope' trend being extraploated), it is clear, as SocGen notes, that internal consumption is expected to stall through H2 2013 and push Spain back into recession in Q1 2014...
Via SocGen,
...despite the small improvement in unemployment in Q3, to 25% vs. a previous 26%, the labour market situation is still too poor to stimulate domestic demand in the short term. As before, we see the 2013 real GDP in negative territory at -1.0%, with more amendments to government expenditure items expected.
As the Bank of Spain pinpointed in its latest economic report, government consumption and specifically employee compensation is yet to be adjusted. We thus expect the impact on GDP to kick in early 2014 and bring Spain back to recession.
Chart: Bloomberg