Who Blinks First? Not Greece!
Saturday, June 16, 2012
The ”strong” core of the European experiment blinked first, in line with the “ransom” paid to Spain as opined in “Spain Gets Ransom, Eurozone Still Hostage.” According to the Financial Times Deutschland the European Union is open to renegotiating the austerity measures imposed on Greece after Sunday’s elections, so the country does not exit the euro.
While central banks are preparing coordinated action in response to the Greek elections, the UK announced plans for a £100 billion program to prop the British economy, aiming to cut bank funding costs in exchange for lending commitments. Meanwhile, the deposit outflow from Greek banks continues unabated.
Moody's slashed Spain's credit rating by three notches on Wednesday, days after the government set a deal to borrow 100 billion euros to patch its banks, increasing the country’s debt burden. France was downgraded by Egan Jones from A- to BBB+ and the market yawned, while the long-term debt and deposit ratings for five Dutch banking groups were also downgraded, further expanding the theme. Late Friday Moody's downgraded the long-term ratings of 12 Spanish sub-sovereign entities, comprising eight regional and local governments (RLGs) and four related issuers.
Truth be told, the European debt crisis can easily drag for another two or three years, while markets will ebb and flow on a myriad of conflicting information that will keep hope alive until the nicotine patches are exhausted. Then Europe will smoke again.
U.S. Economics: The Federal budget deficit was $124.6 billion, or more than twice the $57.6 billion deficit registered one year ago, and a reversal of fortune from the surplus of $59.1 billion the previous month. And all was quiet on the political front.
Import prices decreased 1.0% in May, after no change the previous month, with lower fuel and nonfuel prices contributing to the decrease. Export prices also declined in May, falling 0.4% after a 0.4% increase the previous month. Lower gasoline prices contributed to retail sales falling 0.2% in May, although consumers cut overall purchases for the second month in a row. April sales were revised lower to a 0.2% decline from an original reading of a 0.1% increase, and the first back-to-back decrease in two years.
The PPI — wholesale prices — fell 1.0% in May, with energy prices falling 4.3%. This is the largest decline since July 2009. The core PPI (excluding food and energy prices) rose 0.2% in May. Core prices are up 2.7% in the past year, and a far cry from the expected inflation caused by the Fed’s actions thus far. CPI dropped 0.3%, the most in three years, while the core reading rose 0.2%.
Business inventories rose 0.4% to $1.58 trillion, while the inventories/sales ratio remained constant at 1.26. Jobless claims continued their trend north, with claims rising by 6,000 last week to 386,000, and the previous number was revised up to 380,000 from 377,000. The current account gap, the broadest measure of international trade, increased 16% to $137.3 billion from a revised $118.7 billion in the prior quarter, with the impact from Europe and the Asian economies taking its toll.
Meanwhile, the Empire State Manufacturing Survey dropped considerably by 15 points, but remained positive at 2.3. New orders index was lower by 6 points to 2.2, and the shipments index fell a steep 19 points to 4.8. Industrial production slipped 0.1% in May after gaining 1% in April, which was revised lower from an initially reported 1.1% increase. Capacity utilization was virtually flat at 79%. Preliminary UoM consumer sentiment dropped a larger than expected 5.2 points to 74.1, and will support the talk for additional stimulus.
Global Economics: Chinese banks lent more in May, with new loans totaling 793.2 billion yuan, greater than the 750 billion expected and well above the previous month’s total of 681.8 billion yuan. Broad money supply grew 13.2% year-on-year, above the 12.7% expected rate and 12.8% in April.
China’s foreign direct investment was unchanged in May from a year earlier, a pause after six straight months of declines. China attracted $9.23 billion of FDI in May, just 0.05% more than the same month a year earlier, while FDI over January-May decreased by 1.91% from the year-earlier period to $47.11 billion. In April, FDI fell 0.74% on year to $8.4 billion, and the slowdown continues.
Industrial production in the Eurozone contracted, dropping 0.8% on month and 2.3% on year. The largest decreases were in Portugal, Italy and, notably, Germany. Eurozone CPI was steady at 2.4%, opening the door for the ECB to ease, which once again runs counter to their fear of capital outflows.
Market Trends: The week ended with stocks moving to short-term positive from neutral, except for the Nasdaq 100 where Apple, the main index driver thus far, has become unappealing. S&P 500 and Dow long-term trends turned neutral from negative, although we closed on a major test zone that must be surpassed. The dollar turned negative and the euro positive, while the yen is positive once again and annoying the BOJ and an army of exporters. WTI and Brent oil are simply stuck in negative for the time being, as economic projections are proving to be too optimistic. Copper closed at $3.38, switching to a neutral trend from negative, while gold and silver turned positive mid-week and will try to conquer overhead resistance, while the usual sales pitch of owning precious metals for a rainy day is losing its luster with investors. The 10-year Treasury rate is still at bargain prices, closing at 1.58%. The 10-year notes turned neutral. 30-year bonds have been in neutral territory for 2 weeks, while the media at large expects Europe to fall apart next week. Back to the blinking game, and fast talking, finger-pointing bureaucrats from the holier-than-thou nations will have to eat their threats next week, and keep the charade alive.