NEW$ & VIEW$ (29 NOVEMBER 2013)



Markit’s latest batch of retail PMI® data for the eurozone signalled an ongoing downturn in sales in the penultimate month of 2013.

The Markit Eurozone Retail PMI, which tracks month-on-month changes in the value of retail sales, edged up to 48.0 in November,  from 47.7 in October. That was indicative of a moderate depletion in sales. The PMI was only just below its long-run average of 48.5, however, and greater than the trend shown over the first half of 2013 (45.7).

Eurozone retail sales continued to fall on an annual basis in November, extending the current sequence of contraction to two-and-a-half years. The rate of decline eased since October, but remained sharp.



German retail sales increased for the seventh month running in November, the third-longest sequence of continuous expansion since data
collection began in January 2004. The rate of growth remained moderate, however, and slower than the trend pace registered since May.

Retailers in France registered a third successive monthly decline in sales in November. That said, the rate of reduction slowed further to a fractional pace.

The Italian retail sector remained mired in a steep downturn in November. Sales fell for the thirty-third month in succession Disappointed smile, the longest sequence of decline in the survey history. Moreover, the pace of contraction accelerated again in November, to the fastest since July.

Retailers continued to cut purchases of new stock and jobs in November. Adjusted for seasonal factors, purchasing activity fell for the twenty-eighth month running, the longest sequence of decline in the survey history. Moreover, the rate of contraction in the latest period was the fastest since April.

Stocks of goods held by retailers declined in November, having risen slightly in October. Retail employment meanwhile fell marginally for the third month running.

Average purchase prices paid by retailers for new stock rose sharply in November, at a rate broadly in line with the long-run survey average. Italian retailers continued to feel the effects of the recent VAT increase, although Germany posted the strongest overall rate of inflation. By product sector, food & drink registered the steepest inflation of purchase prices for the fifteenth month in a row.



Euro-Area Inflation Holds at Less Than Half ECB Ceiling

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union’s statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent.

The core inflation rate rose to 1 percent in November from 0.8 percent. Economists had forecast that it would increase to 0.9 percent.

Euro-Area Unemployment Unexpectedly Drops Amid Recovery

The jobless rate fell to 12.1 percent in the 17-nation economy from a record 12.2 percent in the prior month, the European Union’s statistics office in Luxembourg said today. Economists had forecast the jobless rate to remain at 12.2 percent, the highest since the euro’s debut, according to the median of 34 estimates in a Bloomberg survey.

The jobless rate in Spain rose to 26.7 percent in October, even after the economy resumed growth in the third quarter. Italy’s unemployment rate held at 12.5 percent last month, today’s report showed. In Germany, Europe’s largest economy, the jobless rate remained steady at 5.2 percent.

A Stumbling Core Presents ECB Fresh Worries

The recent news from the euro zone gives the European Central Bank plenty to chew over. The region’s most beleaguered economies are getting a bit better. But the core is getting worse.

The latest mini-bombshell to hit the euro-zone economy was the decision of credit agency Standard & Poor’s to strip Netherlands sovereign debt of its AAA-rating, notwithstanding that the Dutch government has been paring back its deficit, that the country’s gross debt is moderate and that it routinely runs current account surpluses in excess of 10% of GDP.

Instead, S&P focused on the fact that the Dutch economy is contracting and unemployment has been rising. Those weak fundamentals will cause the government’s deficit to get worse and national debt to swell over the coming years, according to IMF forecasts.

But the Netherlands isn’t the only core country to raise concerns. Recent German data have also shown some worrying trends–albeit not nearly to the same degree.

German jobless claims have ticked up during the past couple of months, surprising forecasters. At the same time, consumption has stumbled. Retail sales declined again in October, having fallen the previous month.

France is slipping from the doldrums to something worse. This is a problem as it’s widely seen as a bellwether for the wider euro zone: though its economy is only second in size to Germany, it isn’t quite core while it also can’t be lumped in with region’s hardest hit countries. Consumer spending is down, unemployment is high and there are precious few signs of where growth might come from.

So where does that leave the ECB?

Recent fears that the single currency region was slipping towards a deflationary spiral were alleviated a little by the latest set of inflation numbers: euro-zone consumer prices rose 0.9% on the year to November up two tenths of a percentage point from October. At the same time, the unemployment picture eased slightly, with the jobless rate declining to 12.1% in October from a record 12.2% the previous month.

But set alongside the news from the core, that’s hardly solace.

The ECB cut its key rate a quarter point at its October meeting. Rates can’t really go down much from here before going negative. Although the ECB assures us that it is prepared to take that step, there are good reasons to believe it would avoid doing so as long as possible for fear of signalling it has nothing left in its monetary armory.

And yet it needs to do something. The most recent data show that euro-zone money supply is barely growing while the pace at which credit to the private sector is contracting seems to be accelerating.

One possible step is to do another round of bank funding, but making it contingent on banks’ extending loans to households and firms, similar to the Bank of England’s Funding for Lending scheme.

The ECB won’t have failed to notice that the U.K. economy has picked up to the point where the Bank of England yesterday said it would stop making further FLS funds available for mortgage lending from January. That might work if the stumbling block in Europe is lenders’ unwillingness to extend credit. But if it’s a question of reluctant borrowers because they can’t see where income growth is going to come from to pay back from loans, the ECB is stuck.

Hollande boosted by fall in unemployment

(…) Figures from the ministry showed the number of people without work seeking iobs fell in October by 20,500, although the total stood at 3.27m, still close to a record high. (…)

Unemployment, on internationally comparable measures, still stands at just under 11 per cent of the workforce. Most economists predict it will not peak until next year. (…)

But critics have pointed out that much, if not all, of the improved figures on unemployment is due to state-sponsored, make-work schemes aimed chiefly at those under 25 years of age. Tens of thousands of jobs are being created this way.

Economic growth remains well below levels needed to generate significant numbers of private-sector jobs. (…)

Upgrade Lifts Spanish Shares

Spanish shares and bonds were lifted by an upgrade to the country’s credit outlook by Standard & Poor’s, while wider European stocks and the single currency took a pause from their recent rally.

European Banks Could Take Their Hits Early

European banks could face a torrid fourth quarter as they face up to next year’s asset review by the European Central Bank.

That’s not the banks’ only problem. They also need to comply with minimum capital requirements under Basel III regulations; and ensure they meet leverage ratio rules designed to make them less reliant on borrowed funds. In sum, European banks could need to plug a €280 billion ($380.21 billion) capital gap, according to a report by PwC. Technical adjustments could reduce the gap by around €100 billion. But banks could still have to raise €180 billion from new capital raising or restructuring, PwC reckons.

Rather than wait for the ECB, banks could try to get ahead. Already this year European banks have issued €60 billion of new equity, according to Thomson Reuters data, up from €30 billion in the whole of 2012. Banks like Barclays and Deutsche Bank have undergone sizable rights issues.

But the process is far from complete. One implication is that banks could use upcoming fourth-quarter results to clear the decks, so that their balance sheets anticipate as far as possible the rules they expect the ECB to apply in its asset quality review. The European Banking Authority last month issued standards for defining nonperforming loans, aimed at stemming divergent practices across the euro zone. Banks could apply them as soon as the current quarter, according to senior executive at a major European bank—with the aim of getting their balance sheets in shape before the ECB’s inspectors come to town.

That could make the coming earnings season something of a bloodbath. Already, reserves against bad loans look short in some countries. Italian banks’ reserves covered only 41% of their bad loans at the end of September, according to Morgan Stanley.  If they were to raise that ratio to 65%, say, Italian banks would need an extra €11.3 billion of capital to meet a minimum core tier one equity ratio of 8%.

Banks in other countries have made progress earlier. Spain’s central bank this year forced its banks to clean up their mortgage lending books. That’s one reason why Spanish banks on average trade at close to their tangible book value, compared with Italian banks that trade at around 0.6 times tangible book, according to Berenberg Bank: Investors simply trust Spanish banks’ accounts more right now.

Bridging the credibility gap is becoming a matter of urgency for Europe’s banks.

Mind the WTI-Brent spread!

The WTI-Brent spread is at a record wide of almost $20 per barrel. This isn’t, of course, what was supposed to happen.

As JBC Energy wrote on Thursday:

January crude futures moved in opposite directions with ICE Brent posting a moderate gain of 43 cents per barrel to settle at $111.31 even as Nymex WTI took a heavy hit, settling at $92.30 per barrel, down $1.38 on the day. Brent prices found further support in ongoing chaos in Libya. Plenty of excitement also came on yesterday’s release of both weekly and monthly EIA data. US crude production for the week ending 22 November surpassed the 8 million b/d level for the first time since 1989 and crude stocks appear to be zeroing in on the record levels seen in May, despite higher utilisation. This is all the more remarkable considering that this is the time of the year when stocks tend to remain flat before heading south due to less maintenance and tax considerations. It is therefore hardly surprising that the market reacted to this strong counter-seasonal trend by widening the WTI/Brent discount by another $1.80 to $19.01 per barrel.

Lacking a legal way to export crude, Saudi America was supposed to find a way to export shale surpluses by way of product markets. Turns out, however, there’s only so much the US system can export in this way. Not because it doesn’t want to, but rather because there’s a fresh bottleneck impeding such exports.

Most product exports come out of Padd III, the Gulf coast, but the area has a finite capacity. Currently, refiners and product sellers can’t load the product quickly enough onto ships to take advantage of the spread that can be captured. This means Padd III stocks are rising, turning the Gulf Coast into something like the new Cushing. This is particularly apparent during the non-US driving season, when refiners are forced to rely more on export markets.

Here’s a chart illustrating the phenomenon from Stephen Schork last week:

Product cracks are arguably the best clue we have to how quickly these bottlenecks are being overcome. So, whilst they are currently weak, if the US really was having the sort of export binge that could correct the WTI-Brent spread, they’d probably be much, much weaker.

If and when product spreads begin to collapse, one can consequently expect the WTI-Brent spread to turn begin diminishing.

For now, a chart courtesy of the EIA, in which the new ballooning Padd III post-shale product hoarding trend can be clearly observed:



Sober Look adds:

These changing dynamics in the US energy markets are having two major effects:

1. US refineries are loving this. The government is holding down domestic crude prices by limiting exports, while allowing refiners to sell as much gasoline abroad as they want. Refined products abroad are generally priced based on Brent, allowing the refineries to capture the spread. In effect the US government is subsidizing the refining business at the expense of crude oil producers. And here is how the stock market is reacting to these recent price changes.

(TSO = Tesoro Corporation, a major refiner; XLE = diversified energy index ETF)

2. This is putting pressure on nations who traditionally sell crude to the US. While in the past they were able to sell their crude close to international prices, they now get paid much less due to Louisiana Light Sweet becoming significantly cheaper than Brent.

FT: – Imports to the Gulf Coast tend to be priced off local benchmarks including LLS and the Argus sour crude index, a basket of four heavier Gulf Coast crudes. With Gulf Coast prices falling, exporters such as Saudi Arabia and Venezuela are receiving less revenue for their sales into the US.
The discounts of US crude show no sign of ebbing with oil inventories continuing to rise as production grows, and many refineries remaining closed for maintenance.

Needless to say, these nations are not happy with the US as they now have to find alternate buyers in order to get the full price for their product. And many in the US are quite happy with this outcome.
When Louisiana crude was trading at a premium to Brent, analysts thought that by improving the transport system from Oklahoma to the Gulf will eliminate the Brent-WTI spread. Instead it simply shifted the discount further “downstream”. And with that came other unintended consequences that often result from uneven regulation.


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