NEW$ & VIEW$ (16 JANUARY 2014)

INFLATION WATCH

U.S. Consumer Prices Rise 0.3% in December

The consumer-price index rose a seasonally adjusted 0.3% in December from the prior month, the Labor Department said Thursday. Core prices, which strip out volatile food and energy costs, were up a mild 0.1%.

Compared with a year earlier, overall consumer prices increased 1.5% and core prices were up 1.7%. Energy prices led the monthly gain, with gasoline prices rising 3.1%. (…)

Pointing up A separate report Thursday showed inflation-adjusted average weekly earnings fell 0.5% in December from the prior month.

Real average weekly earnings are unchanged from a year earlier, giving many consumers little additional spending power.

U.S. Producer Prices Rise 0.4%

U.S. wholesale prices climbed in December after falling for most of the fall, but broader trends suggest inflation pressures remain subdued.

The producer-price index, reflecting how much firms pay for everything from paper to trucks, rose a seasonally adjusted 0.4% from November, led by a jump in energy costs, the Labor Department said Wednesday. That followed two consecutive months of declines and marked the biggest increase since June.

Core producer prices, which strip out volatile food and energy costs, increased 0.3%. But almost half of that rise was due to a surge in tobacco prices, which a Labor Department economist attributed to a routine price adjustment by manufacturers that occurs several times a year.

Fed’s Beige Book: Job Market Firming Up

Some regions of the U.S. are confronting labor shortages in construction and other high-skill fields, according to the Federal Reserve’s ‘beige book’ survey of economic conditions.

(…) The Dallas Fed district reported “acute labor shortages” for auditors, engineers, truck drivers and construction workers in late November and December.

The Cleveland Fed said hiring was “sluggish” for most industries, but construction firms were hiring. “Builders reported a scarcity of high-skilled trade workers,” according to the report. “As a result, there is upward pressure on wages, and subcontractors are demanding and getting higher rates.” (…)

“The labor markets showed signs of tightening,” the Minneapolis district reported, with 30% of businesses saying they expect to hire more full-time workers in 2014 versus 18% who expect to have fewer full-time employees.

In the Richmond district, there were “numerous reports of strong labor demand,” though the report also said few businesses offered permanent jobs to seasonal workers and there was high turnover among low-skill workers.

In all, two-thirds of districts reported “small to moderate” increases in hiring, according to the report, and many companies were optimistic as 2014 began. In the New York district, most companies said they kept staffing flat as 2013 came to a close, but “substantially more businesses plan to expand than reduce their workforces in 2014.” (…)

Most areas reported improving real-estate markets, with residential sales, prices and construction on the rise. Two-thirds of districts said commercial property sales and leasing were up, too.

Prices were described as “stable” in about half the districts and most of the rest reported “small increases,” with a couple exceptions. (…)

Eight of the 12 districts reported “small to moderate” increases in wages.

While spending on tourism and leisure was reportedly “mixed” across the country, the manufacturing sector saw “steady growth” and steady employment.

“A manufacturer in the Dallas district said that for the first time since before the recession, his firm had too many jobs to bid on,” according to the report.

No major changes in bank lending volume were reported, though six districts reported “slight to moderate growth,” three saw no change and one— New York—saw a “moderate decline in loan volume.” (…)

Robots vs humans (BAML)

Euro-Zone Inflation Weakens

Eurostat said consumer prices rose 0.3% from November, and were up 0.8% from December 2012. That marks a decline in the annual rate of inflation from 0.9% in November, and brings it further below the rate of close to 2.0% targeted by the ECB.

Eurostat also confirmed that the “core” rate of inflation—which strips out volatile items such as food and energy—fell to 0.7%, its lowest level since records began in 2001.

Lagarde warns of deflation danger IMF chief says ‘ogre’ of falling prices must be fought decisively

No reason for ‘irrational inflationary fears’ – ECB’s Weidmann

 

Europe Car Sales Fell in 2013

European car sales fell for the sixth straight year in 2013, despite a pickup in registrations in the final months of the year that sparked hope of a broader recovery in the region.

The European Automobile Manufacturers’ Association, known as ACEA, said Thursday that 11.9 million new cars were registered in the European Union last year, a decline of 1.7% compared with the previous year.

A moderate recovery of car sales in the second half of the year gathered pace in December, according to the ACEA data, but wasn’t strong enough to pull the industry into positive territory for the year. In December, new car registrations rose 13% to 906,294 vehicles—the strongest rate in the month of December since 2009 but still one of the lowest showings to date, ACEA said. Registrations also grew in the fourth quarter. (…)

Russia Faces Stagflation, Central Banker Warns

The emerging-market economy ‘can speak of stagflation,’ the Bank of Russia’s first deputy head tells an economic conference.

(…) Russia’s economic growth has been slowing amid dwindling investment, hefty capital outflows, and weak demand and low prices for its commodities exports. Officials repeatedly downgraded forecasts for economic growth last year to 1.4%, a far cry from the average annual pace of about 7% during the early 2000s and well below the medium-term target of 5% set by President Vladimir Putin. Consumer prices grew 6.5% last year, above the 5%-to-6% range the central bank was targeting.

The government acknowledged last year that the slowdown was a result of domestic economic vulnerabilities, such as low labor productivity, and not just a weak global economy, as it had earlier asserted. The economy ministry slashed its growth forecasts for the next two decades. It also warned that the oil-fueled growth that has been a foundation of Mr. Putin’s rule is over and that there is nothing ready to take its place, given the country’s poor investment climate and aging infrastructure.

In a sign of Russia’s waning appeal to foreign investors, the European Bank for Reconstruction and Development said Wednesday that its investments in Russia fell sharply last year to €1.8 billion ($2.5 billion) from €2.6 billion in 2012. (…)

Japan machinery orders hit five-year high
Data hint at greater corporate capital investment plans

(…) Orders of new machinery by businesses, considered a leading indicator of overall capital investment, surged to a five-year high in November, rising 9.3 per cent to Y882.6bn. The year-on-year increase, which handily beat analysts’ expectations, was the second in two months and the fifth biggest on record. (…)

Brazil raises benchmark rate to 10.5%
World’s most aggressive tightening cycle continues

The central bank raised the Selic rate by 50 basis points to 10.5 per cent on Wednesday, extending the world’s most aggressive tightening cycle. It has raised interest rates by 325 basis points over the past nine months. (…)

At Brazil’s previous interest rate meeting, the central bank changed its statement for the first time in months, signalling the tightening cycle would soon be over.

However, a surge in prices in December took the central bank by surprise, likely forcing a revision to the country’s monetary policy strategy, economists say.

Data from the national statistics agency last week showed consumer prices jumped 0.92 per cent in December, the most since April 2003.

The annual inflation rate for the month – 5.91 per cent – also came in above estimates from all analysts in a Bloomberg survey and far above the country’s official 4.5 per cent target. (…)

ITALY IN 3 CHARTS (From FT)

SENTIMENT WATCH 

Actually, the appropriate headline should be “The Bulls…ers Are Back” Crying face

Bulls Are Back

The stock market’s slow start to the year lasted all of two weeks, as back-to-back rallies pushed the S&P 500 back up to a record high.

(…) In a note to clients, Craig Johnson, Piper Jaffray’s technical strategist, said the market’s primary trend will remain higher in the coming months. He predicts the S&P 500 will jump another 8% and hit 2000 before suffering through a nasty correction around the middle of the year that could take the index back to the 1600-to-1650 range.

Such a drop from his projected peak would take the S&P 500 down as much as 20%, a drop that hasn’t occurred since the summer of 2011.

But have no fear, stock-market bulls. He then sees stocks staging a sharp rally through the end of the year, lifting the S&P 500 to 2100 and capping a 14% gain for the year. “A hop, a drop and a pop in 2014” is how Mr. Johnson predicts it will play out, as rising bond yields will prompt more cash to flow out of bonds and into stocks throughout the year.

“We believe that 2014 will be a good year, but not a great year like 2013,” he said. (…)

Choppy equities require investor focus
End of loose money spells change in market’s inner workings

(…) Whether 2014 is a profitable year will come down to investors relying less on endless liquidity from the Federal Reserve that, like a high tide, has floated all equity boats. Instead they must focus on specific sectors and opportunities such as likely merger and acquisition targets in the coming months. Sarcastic smile (…)

Yeah! Sure! Let’s all do that. Thank you FT.

 

ITALIAN DRAMA NO GREEK TRAGEDY

Italy is not Greece. In recent weeks, markets have overestimated contagion risks to Italy. Burlesquoni gone, the Commedia del Arte has, thankfully, come to an end.

“It is like celebrating the end of the war,” said Eduardo, a hotel receptionist. Asked if Italy was ready for sacrifices under a Monti government, he replied: “We deserve them. We elected Berlusconi not once or twice but three times. We have to get out of this mess.” (FT)

I spent nearly 3 weeks in Italy last September and what I saw from Firenze to Milan, to Verona and up to the Swiss border was nothing suggestive of a bankrupt country. Italy’s North is vibrant and industrious and much less inclined to welfare than the Southern part. The unemployment rate in the North is about 4.5% compared with 8.3% for Italy. Importantly, some 50% of the population lives in the North and that proportion is increasing as more Italians move towards the more prosperous regions.

Italians have grown very frustrated by the inefficient and ridicule Berlusconi government and even business people who initially supported him were openly calling for his departure in early September.

The highly respected Mario Monti will be leading a caretaker coalition government that will implement the reforms Italy needs to get back on a solid footing. Monti has been made a senator for life: he is thus prohibited from forming his own political party, a scenario that derailed another technocrat government in the mid- 1990s. Goldman Sachs recently wrote:

Continue reading

 

NEW$ & VIEW$ (3 Nov. 2011)

Rainbow   PAPANDREOU IS PAST:   Defections Deepen Greek Debt Crisis The prime minister called an emergency cabinet meeting after defections by his party’s lawmakers over his plan for a euro referendum erased his majority in Parliament. The country’s finance minister also came out against the plan.  That means that Mr. Papandreou’s already slender governing majority has now been slashed to 150 seats in Greece’s 300-member parliament—effectively making it impossible for him to govern.

Several other socialist lawmakers called for the creation of a unity government that will secure approval of Greece’s latest loan agreement and lead the country to new elections.

The officials said that Mr. Samaras was prepared to reconsider his reluctance to participate in a government of national unity if Mr. Papandreou stepped down as prime minister and a snap election date was set immediately.

“We are prepared to discuss an interim solution if he [Papandreou] goes,” one of the people said.

A senior Pasok deputy said he believed a Mr. Papandreou resignation and the formation of a national unity government was the most prominent scenario.

Money   Storm cloud   BNP Paribas Net Hit By Sovereign Debt

BNP Paribas said third-quarter net profit slumped a worse-than-expected 72% after it slashed its sovereign debt exposure in Italy and took a hefty write-down on its Greek debt.

Lightning   ITALY WATCH: From FT Alphaville: A chart from the Markit ADACI report, with an IP series. Expectations for October were apparently 47.1, so the final figure of 43.3 is shocking.

Concerning jobs:

Employment within the Italian manufacturing sector fell at an accelerated pace in October, decreasing at the sharpest rate since February 2010. Firms reporting lower staff numbers compared with the previous month often indicated leaving vacated positions unfilled. In addition, firms also made redundancies during October.

Italy’s fundamental problems can be summarized as follows:

 

Lightning   GREECE WATCH: The MoM drop in Greece’s PMI was also horrendous.

[The PMI] read 40.5 in October, down from 43.2 in September, signalling the fourth sharpest deterioration in the operating conditions of Greek manufacturing firms in the survey’s twelve-and-a-half year history. (…)

New orders received by Greek manufacturing firms continued to decrease during October as panellists indicated a further weakening in domestic demand. New business contracted at the third fastest rate in the survey history. (…)

Although the rate of increase in unemployment eased month-on-month, it remained marked, and extended the current period of falling head counts to 42 months.

US ECONOMY

Snail   CATCH ME IF YOU CAN: The Fed lowers its growth outlook for 2011 to 1.6%-1.7%, 2.5%-2.9% in 2012, 3%-3.5% in 2013, and 3%-3.9% in 2014. It sees unemployment at 9%-9.1% this year, 8.5%-8.7% in 2012, 7.8%-8.2% in 2013, 6.8%-7.7% in 2014. Personal consumption expenditure inflation is forecast at 2.7%-2.9% this year, 1.4%-2% next year, 1.5%-2% in 2013, 1.5%-2% in 2014. Also:

there are “significant downside risks to the economic outlook.”

image

 

Thumbs down   IRA ON MF GLOBAL:

In this issue of The Institutional Risk Analyst, we ignore the collapse of MF Global and the latest machinations of former Goldman Sachs (“GS”) partner Jon Corzine. Before leading MF Global to its doom, Corzine presided over fiscal chaos as governor of New Jersey. So the masters of the universe are human after all. When will people learn that the Boys from Broad Street are not the best bankers in the world? They just have the brazen hutzpah to ask for the big money in return for access to “the game.”

New York — The key point to be made about MF Global is that a primary dealer in US government bonds failed with the Obama Administration and the US Treasury apparently clueless. Only on Friday when bankruptcy counsel had been retained did the Fed of New York pull dealer lines from MF Global. From what we hear from the pits, MF Global should have been pulled as a primary dealer weeks ago.

As you consider this latest evidence of incompetence at the FRBNY, read Binyamin Applebaum in the NYT, “Report Says New York Fed Didn’t Cut Deals on A.I.G.” Is this the smoking gun of duplicity and corruption between the FRBNY and GS that sinks Secretary Timothy Geithner? Specifically, did the payments to GS and other larger dealer counterparts of AIG reflect corruption by Geithner, perhaps an accommodation to be rewarded in the future? Nobody knows about the time value of money better than the partners of GS. Just ask former FRBNY President Gerald Corrigan, who was rewarded with a sinecure at GS after being hastily ejected from the FRBNY in 1993.

 

QUICK READS

GOP Balks at Taxes to Pay For Jobs Plan The prospects for Obama’s jobs plan grew dimmer as he unveiled the fine print of how it would be paid for—primarily through tax increases that Republicans said would destroy jobs, not create them.

Tax break cuts linked to Obama jobs plan President proposes to limit mortgage deduction. Jack Lew, White House budget director, said the president was proposing to cover the cost of the short-term stimulus for the ailing US economy with $467bn in additional revenues over the next 10 years. Most of the savings – worth about $400bn – would come from limits to the ability of American households earning more than $250,000 per year to deduct items such as mortgage interest and charitable donations from their taxes.

Obama Moots Limits on Tax Breaks for Muni Bonds President Barack Obama proposed curbing the amount of interest from municipal bonds that top earners can exclude from their taxable income, a step that may diminish demand for state and local-government securities.

Congressional Job Approval at 15% These results are based on interviews conducted in a Sept. 8-11 Gallup poll, as President Barack Obama urged Congress to pass his newly announced major jobs plan legislation.

Do you approve or disapprove of the way Congress is handling its job?

Italian Bond Auction Disappoints Italy paid sharply higher yields than at previous auctions to sell five- to nine-year government bonds, and garnered disappointing demand, selling below the maximum targeted amount.

Italy in Talks With China on Bonds Italy’s Finance Ministry has held talks with China’s sovereign-wealth fund and other Chinese officials in a bid to persuade Beijing to buy large amounts of Italian bonds, a person familiar with the matter said, as Rome searches for ways to meet its financing needs and pull the peninsula out of the euro-zone debt crisis.

Italian Industrial Output Slumps Italian industrial output fell much more than expected in July due to the sharpest contraction of consumer-goods production in more than two years. Industrial output in the euro zone’s third-largest economy fell 0.7% from June on a seasonally adjusted basis. Istat also revised down its June data, saying industrial output actually fell 0.8% that month from May, worse than the disappointing 0.6% drop reported on a preliminary basis last month. As a result, Italy’s industrial production is back at its lowest level since January.

Greece’s Efforts Fail to Calm Investors flooded into the safe arms of German bonds, and European banks dialed back lending to their riskier peers, in a clear sign that fears of a destabilizing collapse in Greece persist despite fresh efforts to shore up its finances.

Europe and 2011 Are Not Working Out So Well

OPEC Hints at Output Cuts OPEC hinted that some of its members could reduce production as a slowing economy is expected to dent oil demand and Libya resumes exports more rapidly than expected. Libyan oil production should resume within days and could reach one million barrels a day, around two-thirds of pre-war levels, within six months, it said.

India Factory Output Growth Slows In yet another sign that India’s economy is cooling, the government said the country’s industrial output growth slowed more than expected in July to 3.3% from a year earlier.

The Dark Side of Brazil’s Rise Brazil’s boom has downsides. The abundance of cash from overseas investors has helped fund riskier bank loans and fueled a potential real-estate bubble.

[BOOM_p1]

BofA to Cut $5 Billion Bank of America will cut $5 billion in annual costs by the end of 2013 and slash 30,000 jobs out of its consumer-oriented businesses, part of an important trimming program.

Nomura to Cut About 5% of Jobs in Europe Fewer than 400 positions will be eliminated globally, with the majority in Europe, one of the people said.

U.K. Inflation Rises The consumer-price index rose 4.5% in the 12 months through August, up from 4.4% in July. In monthly terms, overall consumer prices rose 0.6%. So-called “core inflation”, which strips out volatile food and energy prices, remained steady at 3.1 per cent in August.

UK inflation

China’s Lessons From Mexico and Japan Is China the next Japan, or the next Mexico? Its real-estate bubble and bad loans at banks make it similar to Japan, but its failure to focus on education invites comparisons with Mexico and is a more serious threat.

[CHINAHERD]

 

QUICK READS

Switzerland Sets Ceiling for Franc Switzerland took drastic action to protect its exporters by setting a cap on the franc’s exchange rate against the euro, roiling currency markets and setting itself up as a big buyer of euro-zone assets. The central bank said that with immediate effect it will no longer tolerate the euro trading below 1.20 francs.

Gold Hits New High Spot gold returned to record-breaking territory, as risk aversion and a steadying dollar provided the right ingredients for a renewed move toward $2,000 a troy ounce.

Europe Signals Global Gloom International financial markets tumbled as a darkening global economic outlook and deepening fissures in Europe over its debt crisis fueled fears the world economy could slip into a period of prolonged malaise.

European Stocks Rebound From Two-Day Tumble The Euro Stoxx 50 of the biggest euro-area companies rose 0.9 percent to 2,125.15 at 11:38 a.m. in London after tumbling 8.6 percent over the previous two days. The gauge declined 14 percent in August amid concern global economic growth is slowing as Europe’s debt crisis spreads.

Europe Bank Shares Drop Battered European banks suffered further steep share-price declines on Monday as investors grew more concerned about the banks’ access to funds.

Obama Mulls Tax Cuts Beyond Republican Plans  In a speech to a union crowd in Detroit yesterday, Obama said he would challenge Republicans on taxes. “You say you’re the party of tax cuts?” Obama said before the annual Metro Detroit Central Labor Council rally. “Well then, prove you’ll fight just as hard for tax cuts for middle- class families as you do for oil companies and the most affluent Americans.”

Obama Speech: On Friday, Ed Henry quoted an unnamed presidential aide telling Fox News that while he didn’t want to “downplay the speech,” he needed to shoot down “the idea that this is the be-all and end-all.”

Fed ‘hawk’ Lacker says stimulus will only hit inflation Policymaker reveals extent of central bank divisions.

German Manufacturing Orders Fall German manufacturing orders fell sharply in July, initial data from the Economics Ministry showed. Seasonally-adjusted data for July showed new orders falling 2.8% compared with June. Foreign orders fell 7.4% on a monthly basis, while domestic orders increased 3.6%. The biggest monthly drop was in capital goods orders, which fell 7%, with foreign orders dropping 12.8% and domestic orders growing 3.6%.

Italy hit by anti-austerity strike The country’s largest labour union shuts down air, land and sea transport and curtailed other public services.

Italy: eurozone crisis decider If Italy becomes infected, the eurozone does not have the resources to rescue Rome.

Government bond spreads

Food Prices in China Continue Climb China’s food prices continued to rise last week with pork prices hitting a record high, signaling that inflationary pressures have yet to ease significantly.

World Bank Chief: Inflation China’s Top Concern World Bank President Robert Zoellick, on a visit to China, said inflation remains Beijing’s most pressing immediate concern.

Banks start mopping up more liquidity China’s commercial banks will put a total of 900 billion yuan ($140.79 billion) in reserve over the next six months starting Sept 5 as the government takes a new approach to mopping up market liquidity.

China Vanke sales fall 12.6% in Aug China Vanke Co, the country’s largest property developer by market value, said Sept 5 that its sales for August fell 12.6 percent from a year earlier.

Gap in US corporate pension plans hits $388bn Schemes’ assets worth only 77% of their liabilities.
 

QUICK READS

U.S. Auto Sales May Have Stalled in August August vehicle sales, to be released tomorrow, may have run at a 12.1 million seasonally adjusted annual rate, the average estimate of 14 analysts surveyed by Bloomberg. The pace averaged 12.5 million in the first half before slowing to 12.2 million in July. The August 2010 sales rate was 11.5 million, according to Autodata Corp.

German Retail Sales Were Unexpectedly Unchanged Last Month After June Gain Sales, adjusted for inflation and seasonal swings, were unchanged from June, when they jumped 4.5 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 1.5 percent decline, the median of 20 estimates in a Bloomberg News survey shows. Sales fell 1.6 percent in the year.

Euro-Zone Inflation Steady In a preliminary estimate from Eurostat, the European Union statistics agency, consumer prices stayed at 2.5% in the 12 months to August. In July the rate fell to 2.5%, having climbed to 2.7% in the 12 months to June.

Euro-Zone Sentiment Dives Sentiment among euro-zone companies and consumers plunged in August, the latest sign that steep declines in equity markets earlier in the month, public anger over the second bailout of Greece and signs of feeble growth in Germany are taking a severe toll on the economic outlook.

[EUECON]

Outcry over Berlusconi budget reversal Bank of Italy warns of weak growth amid austerity measures. Silvio Berlusconi’s decision to backtrack on his emergency austerity budget and scrap a proposed tax on the wealthy has triggered a popular outcry while risking market confusion and fresh confrontation with the European Central Bank.

Home Prices Below Year Earlier The spring-summer selling season pushed unadjusted U.S. home prices higher in June from a month earlier, but prices remain below year-earlier levels, according to the S&P/Case-Shiller indexes.

Consumers Ramp Up Spending Consumer spending posted strong gains in July despite weak income growth, the latest sign the economy gained some momentum at the start of the third quarter before the stock market began its recent gyrations.

ICSC Weekly Chain Store Sales: +0.1% W/W, vs. -1% last week.+3% Y/Y, vs. +3% last week.

Economy Deeply Divides Fed Fed officials are as deeply divided as they’ve been in decades about how to spur the flagging economy, records show. Officials considered a range of actions—which included setting numerical targets for inflation and unemployment, rejiggering their holdings of Treasury securities and trying to push already-low short-term interest rates a little closer to zero, all with the purpose of boosting markets and economic growth. They also considered doing nothing.

Fed’s Kocherlakota Suggests Dissent Won’t Be Repeated One member of the troika who opposed the Fed’s recent decision to keep rates at rock bottom levels for two years suggested he won’t be repeating his disagreement at coming central bank gatherings. The reason? With the Fed having made its pledge, “I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future.”

India’s Economy Grows 7.7% India’s economy grew 7.7% in the April to June period from the year earlier, the slowest pace in six quarters, confirming fears that a series of interest-rate increases, combined with the global slowdown and a lack of local reforms have kept growth well below the government’s estimate.

[IECON]

South African Growth Falters South Africa’s economy grew just 1.3% in the second quarter from the first three months of the year, a slower-than-expected pace out of step with the country’s ambition to be seen as a muscular emerging market for the continent.

GM slashes prices to keep lead in China The US automaker is sacrificing profit margins to maintain market share in China, cutting prices of low-cost minivans by as much as 15 percent to offset slowing sales in the world’s largest vehicle market.

 

QUICK READS

MSCI World Equities Index 10% Off May High A measure of global equities fell 10 percent from this year’s high in May, entering its first so- called correction in more than a year, as concern grew that the economic recovery is faltering.

Gold Sets New Record

Mohamed El-Erian: US debt ceiling deal is a debacle  It is discouraging that several months of disruptive political bickering and posturing failed to deliver a well-defined medium-term fiscal reform effort. Instead, the legislation signed into law by President Barack Obama on Tuesday is terribly unbalanced in design, lacks proper operational details and leaves key issues to at least one more round of political brinkmanship. This incomplete endeavour could be dismissed as business as usual in Washington except for one important consideration: it materially darkens an already fragile outlook for economic growth and job creation.

US corporate bond yields hit fresh lows Investors put a premium on safety
Industrial groups ring alarm bells Risks to global economy are increasing and growth is slowing

Signs of Stress on the Rise Across Europe The European sovereign-debt crisis placed new strains on Europe’s banks amid signs that some lenders are finding it harder and more expensive to fund themselves. (See also LIQUIDITY “RED ALERT”)

Spain’s Borrowing Costs Rise Again The Treasury paid an average yield of 4.813% on the April 2014 bond, compared with 4.037% at the previous auction June 2. It also paid an average yield of 4.984% on the January 2015 bond, compared with 2.862% at its previous auction held October 15, 2009.

Italy’s Woes Weigh on Europe By the end of trading on Wednesday, the yield on 10-year Italian bonds stood at 6.07%. That makes it more expensive for Italy to borrow money, with investors demanding a premium of 3.66 percentage points over benchmark German bonds. Borrowing costs in Spain—long considered the next most vulnerable euro-zone economy after Greece, Portugal and Ireland, which have already received official bailouts—also continued to rise, with the yield on 10-year Spanish bonds closing at 6.23%. Lower growth makes it harder for heavily indebted economies to escape their debt burdens. Hints that the weakness is starting to affect the euro zone’s hitherto stronger economies will heighten the dilemma facing the European Central Bank, which holds a regular meeting Thursday and has begun tightening policy to make sure it keeps inflation in check.

ItalEcon_jp

ECB Meets Amid Debt Crisis The European Central Bank’s policy council meets amid some expectations that it may resume the purchase of euro-zone government bonds to prevent the debt crisis from spreading to Italy and Spain.

Signs of Slowdown Creep Into Europe’s Powerhouses  After expanding at an annualized pace of more than 3% in the first quarter, the euro zone probably grew at less than half that in the second. Meanwhile, purchasing-manager reports for July suggest euro-area manufacturing was broadly flat to start the third quarter. And Germany is no longer bucking such trends. Its own manufacturing purchasing managers’ index fell to a two-year low last month. New plant and machinery orders fell 2.4% in June from the previous month.

[AOT]

German Factory Orders Rose Unexpectedly in June Orders, adjusted for seasonal swings and inflation, increased 1.8 percent from May, when they rose a revised 1.5 percent, the Economy Ministry in Berlin said in a statement today.

Ex-Fed Officials Back More Stimulus The Fed should consider a new round of securities purchases to spur the economy if growth and employment keep languishing and inflation recedes, former top Fed officials said in a roundtable with The Wall Street Journal.

Calls Grow for Global Effort to Address Debt Crisis Some investors are speculating that an international agreement to ease tensions in the world’s currency markets could be in the offing.

Japan Launches Campaign to Weaken Yen Japan stepped into the currency market Thursday, launching a yen-selling campaign that was backed up by ¥10 trillion (nearly $126 billion) in easing measures from the central bank, as officials say they needed to tame market speculation threatening a fragile economic recovery.

Taming the Yen: Japan\\\

Turkey Surprises With Rate Cut Turkey’s central bank unexpectedly cut its key interest rate to a fresh record low, sending the lira plunging as markets appeared to reject the bank’s strategy to counter gathering global risks.

CEO Confidence Slipped in July Confidence among American chief executives fell for the first time in a year at the start of the third quarter as their outlook on sales, employment, and investment all slipped, according to a private survey. The Young Presidents’ Organization, a nonprofit network of young CEOs with members in the U.S. as well as abroad, said its “overall confidence index” fell to 61.1 in July-down from 64.1 in April.

China Lets Food-Oil Prices Rise Chinese authorities sanctioned a rise in the retail prices for cooking oil, producers said, a sign Beijing is letting households feel some inflation effects after months of price controls. The permission to raise prices, granted by the National Development and Reform Commission, the government planning agency, follows recent increases in other prices that will be felt by consumers. The upward adjustments also come ahead of a July inflation report next week that is expected to show overall price increases leveled after surging to 6.4% in June from the year earlier.

Kal’s cartoon from The Economist

 

ITALY: NEXT PIIGS CRISIS?

From Moody’s Analytics

Italian Banks — Market Signals Deteriorate Rapidly
CDS spreads have now accelerated upward for the largest Italian banks which Moody’s rates and on which we have spread data (Figure 1). This has led to underperformance in the CDS markets as revealed by drops of one to three notches in the banks’ CDS-implied ratings, following improvement earlier this year (Figure 2). CDS spreads on BPM, BPSC, and UBI have widened 70%, 64%, and 59%, respectively, in the last month — the largest moves in our global bank universe.

We wrote in May that Italian banks had shown generally positive credit market performances in the period from February to April, following Mario Draghi’s call for them to shore up their balance sheets in advance of the summer’s stress test. We believed these movements indicated that debt investors were favorable toward the equity offerings, completion of which would improve the quality as well as the quantity of the institutions’ capital.

However, we noted that investors were likely to punish issuers for too much delay if the environment were to become more stressed — if for no other reason than it could raise the cost of short-term financing, which would hurt margins. Although the banks have protected depositors and other creditors by becoming more liquid, they have done so at the cost of longer-term profitability. New equity could be redeployed to higher returning assets — either spread assets like loans, purchases of other banks at deep discounts to book value, or some combination of the two.

image

(…) Moody’s put Italy’s sovereign credit on review for downgrade. Subsequently, the rating agency either changed the outlook to negative or put on review for downgrade 29 banks and two government-related institutions.

image

Equity prices of the five largest domestically-owned Italian banks are down between 10% and 42% this year (average 27%), but on average 48% from their peaks in mid-February (Figure 3). Although listed equity is not the only type of core capital that can be added to get to Basel 3 targets, falling prices for bank equities throughout Europe this year will make raising fresh equity more challenging and theoretically more expensive because it must be done at lower prices to book value. Equities of many of the largest Italian banks were limit-down last Friday, June 24, so trading was suspended.

image

image