Europe "Fixed" Facade Crumbling As German Retail Sales Implode

Remember all those soaring German confidence indices that said ignore the negative GDP print and focus on a future so bright, ze Germans've got to wear Zeiss? Appears the confidence may have been a tad massaged upwards because following a spate of weak corporate results out of Europe's growth dynamo, the German HDE retail association said Christmas sales for November and December were down some 0.7% from the prior year. Specifically German retail sales plunged -1.7% from November on expectations of a modest -0.1% decline, while on a year over year basis December imploded a whopping -4.7% vs expectations of -1.5%. Did the Germans blame the weather of lack of government spending, or maybe say to only focus on the positive aspects of the report (if any)? No. They were not girlie men about it.

Elsewhere in Spain, inflation rose less than expected, as consumer prices rose 2.8% Y/Y - the slowest pace since August and less than the 3.1 percent increase economists predicted. This was somewhat surprising as the country posted a boost in its current account with the November surplus amounted to €1.8 billion compared with €865 million in October and a deficit of €3.9 billion a year earlier, the Bank of Spain said. That narrowed the cumulative shortfall for the first 11 months of 2012 to €13.1 billion from €33.6 billion in 2011. A big reason for this is that central banks and other banks rotated into Spanish bonds on the false assumption that Spain is fixed. Ironically, even the SNB said that it had boosted its AA rated bonds holdings, while trimming their AAA holdings in Q4.

In now traditional news, Greek retail sales in November followed suit and plunged just a tad more than in Germany imploding by some -16.8% in November. Remember: once they hit 0 they can only go up.

But the biggest news certainly was Germany, whose economy continues to deteriorate and is probably what spurred Buba president Jens Weidmann to say that ongoing bailouts could threaten the strongest members.

“If things stay the way they are, the consequences of unsound policies will be too easily passed on to others,” Weidmann said in Berlin late yesterday. “Sooner or later the economically solid countries will be weakened. Liability and control have to be brought into balance.”

Germany, Europe’s largest economy, has pledged more than 300 billion euros ($407 billion) in loans and guarantees to help shore up the finances of euro member states such as Greece, Ireland and Portugal. Weidmann, who’s also a member of the European Central Bank’s Governing Council, has argued that policies including the OMT bond-purchase program come too close to the banned practice of financing states by printing money.


Risks that have been shared via bailouts and ECB emergency measures have already reached a “substantial level,” Weidmann said. “If these risks rise, the culture of stability could be eroded as if we had explicit joint liability.”


Germany shouldn’t allow wages to rise too quickly in order to rebalance competitiveness within the euro area, Weidmann said. An increase in wages of even 5 percent would have no impact on the output of crisis-ridden countries, and would instead damage Germany.

But why would he say that if Europe was so very much was fixed?

In European market news, the picture is as follows:

  • Spanish 10Y yield up 2bps to 5.25%
  • Italian 10Y yield up 2bps to 4.33%
  • U.K. 10Y yield down 4bps to 2.08%
  • German 10Y yield down 4bps to 1.67%
  • Bund future up 0.37% to 141.95
  • BTP future down 0.39% to 112.51
  • EUR/USD down 0.03% to $1.3563
  • Dollar Index down 0.03% to 79.26
  • Sterling spot up 0.15% to $1.5824
  • 1Y euro cross currency basis swap down 1bp to -18bps
  • Stoxx 600 down 0.29% to 287.78

Keep an eye on Italy where things are going from bad to worse, and where we will likely see even more catastrophic bank sector revalations as the local election approaches.

More from DB:

Credit markets extended their relative underperformance yesterday in what is becoming an increasingly monitored theme by other asset classes. The CDX IG 19 index widened by a sharp 4.5bp overnight to 90.25bp bringing the series to the widest since the fiscal-cliff agreement reached at the beginning of the year. We highlighted this theme yesterday but to again give some context to the relative underperformance in credit, when CDX IG was last at these levels the S&P 500 was at around 1460. We are now about 2.8% above those levels.

We’ve also heard some comments about an increasing outflow from corporate bond ETFs lately and also more chatter about the ‘great rotation trade’ from FI to equities for a variety of possible reasons (eg. low yields, a growth rebound, relative tight spreads to yields, event risk concerns and credit supply indigestion).

It does feel that the strong technicals in fixed income are now being tested. While the technical picture may change at some point we are not sure it will be a 2013 story. The fact there is huge reliance on keeping over indebted entities funded and the fixed income market generally solvent will ensure that authorities and Central Banks keep yields artificially low for some time yet. So our feeling is that despite the recent wobbles, flows will still come into FI in 2013 which will limit the sell-off.

Away from the US it was similarly a weak day for markets in Europe. We saw major bourses finish the day lower with Italian equities being the notable underperformer. Indeed the FTSE MIB (-3.36%) suffered its biggest decline in about 6 months driven by a 34% fall in Saipem after announcing a big profit warning. The company said it expects a very significant reduction of about 80% in EBIT this year from its onshore business leading to a wave of broker downgrades. A regulatory investigation on a share sale transaction the day before the profit warning has also been launched. Peripheral bond yields also spiked higher overnight with Italian and Spanish 10-year bonds closing +15bp and +6bp higher at 4.317% and 5.225%.

In other news flow, Moody’s has placed Monte Paschi’s Ba2 rating on review for possible downgrade reflecting the considerably uncertainty over the impact of legacy structured trades entered into by prior management. Italian prosecutors are investigating the  bank’s former management for bribery over a series of structured finance trades. Monte Paschi’s shares fell -9.5% yesterday which also didn’t help the moves in Italian equities.

Asian markets are trading weaker overnight with most bourses trading lower across the region. The Nikkei, Hang Seng and the KOSPI are down -0.23%, -0.35% and -0.25%, respectively. Asian credit spreads are also trading wider although the Asia iTraxx index is now off the wides at 115bp , still +3bp on the day. The 10-year UST yield is steady at around 1.98%.

In terms of today we can expect initial jobless claims, the Chicago PMI and Personal Income/Spending in the US. We have a fairly packed data day in Europe featuring retail sales, unemployment and inflation numbers from Germany. We also have PPI and retail sales from France, CPI in Spain and PPI from Italy.


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