Economic Triple Whammy And QE3 Hope
Saturday, June 02, 2012
Ongoing European debt problems, coupled with China’s “slowdown” and America’s less than stellar economic data provided the perfect storm. However, QE3 talk will start making the rounds, and Fed member Rosengren hinted at another dose of operation twist — or more of the same useless monetary policy.
Spain’s plan to recapitalize Bankia was the source of numerous rumors and a rainbow of opinions that further confused the issue. The ECB reportedly rejected the plan, but then stated that they didn’t have a clue as to what people were talking about. Money is flowing out of Spain to the tune of €100 billion for the quarter, and then WSJ reported that the IMF’s cavalry is coming to town.
The European department of the International Monetary Fund has started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bailout its third-largest bank by assets, Bankia SA, people involved in the handling of the Spanish crisis said Thursday.
When so many rumors start flying around, the outcome is never a happy ending, although the condition is hardly a surprise, because Spain has been living a lie for many years now. China on the other hand talked about a small, ill-defined, stimulus, because the country is in dire straits, albeit its reluctance to acknowledge the condition.
U.S. Economics: Suffice it to say that the S&P/Case-Shiller Home Price Index told us that the first quarter of 2012 ended at new post-crisis lows, yet, on a monthly basis, prices were unchanged. The NAR’s index of pending home sales dropped 5.5%, the most in one year, following a revised 3.8% gain the prior month. Housing is still weak and the much expected rebound will not materialize any time soon. Mortgage rates hit a record low once again, with the 30-year fixed-rate mortgage dropping to 3.75% from 3.78%, although the impact on demand is not visible. The 15-year fixed-rate mortgage is now below 3% for the first time ever, falling to 2.97% from 3.04%.
The Conference Board’s Consumer Confidence Index registered 64.9, substantially down from 68.7 in April, and far from the baseline of 100 set in 1985. The Expectations Index dropped to 77.6 from 80.4, while the Present Situation Index decreased to 45.9 from 51.2 last month, further dampening recovery expectations.
GDP was revised down to 1.9% from 2.2% as expected, with corporate profits increasing at the slowest rate in over three years, as well as smaller wage gains. Unemployment claims jumped to 383,000 while the previous number was revised up by 3,000.
The unemployment rate rose 0.1% to 8.2% and 69,000 new jobs were added, the smallest increase in a year, and compared with the average estimate of 150,000. The average workweek fell 0.1 hour to 34.4 in May, while average hourly earnings climbed 2 cents to $23.41. Employment gains for April and March were revised down, with the April number reduced to 77,000 from 115,000, while March was cut back to 143,000 from 154,000.
On an annual basis, vehicle sales tumbled to 13.8 million from 14.4 million, leaving many puzzled when as recent as March the rate was 15.1 million units. Personal spending increased 0.3%, while personal income fell short, rising only 0.1%. Finally, U.S. PMI contracted slightly to 53.5 from 54.8, while pricing pressures dropped substantially to 47.5 from 61.0.
Global Economics: The BRIC myth continues to unfold with Brazil cutting its key rate to a new record low of 8.5% from 9%. Indian growth dropped to 5.3%, below 6% for the first time in three years, and compared with 9.2% just 12 months ago. China’s manufacturing sector weakened sharply, with the official PMI for manufacturing falling to 50.4 in May from 53.3 in April, its lowest in five months. The fact that the number is still above 50 is a bit distracting because of its “official” nature. HSBC’s final manufacturing PMI for China was 48.4 from 49.3 the previous month, the 7th consecutive month of declines.
Euro area annual inflation dropped to 2.4% from 2.6% in April, reflecting the lower oil cost that everyone is enjoying, while unemployment in the eurozone hit a new euro era record of 11%. German retail sales decreased 2.0% in nominal terms and 3.8% in real terms compared with the corresponding month of the previous year. In France retail expanded 0.6%, after having shrunk 2.6% in March.
Japan's factory output grew a weaker-than-expected 0.2% in April from the month before, while the country’s PMI was unchanged at 50.7.
Market Trends: After reaching for the neutral zone mid week, stock market trends fell back into negative territory. The dollar continued its path north but was hit with the unemployment report, giving back some gains but keeping its positive trends in place. The euro continues to experience an exodus, while the yen benefited from its safe heaven status. Canadian and Australia dollars continued to slide as commodities are becoming less appealing. WTI and Brent oil continued their descent, with Brent breaking the $100 mark and closing at $98.43 — 21% down from its April high — although both contracts are extremely oversold. Copper is reaching for its December 2011 low of $3.25, and its negative trends are a reflection of global PMI readings. Gold rebounded strongly on Friday to $1,620, forcing short positions to close, and turned short-term positive while keeping its long-term negative trend. The move was due to expectations for additional Fed quantitative easing, which may or may not materialize. Silver also rose to $28.51 and turned short-term neutral from negative. The 10-year Treasury rate is at a new record low of 1.47%, while the 30-year bond contract broke above closed at 152-28/32, the highest level ever dating back to 1977. The 10-year contract is also at a record high, and Treasuries are positive all around. Although their rally is over extended, their function is to be the canary in the coal mine, as well as the true global safety net, according to the market.