Eurozone Is A Time Buying Machine
Saturday, June 30, 2012
European Union leaders got together in Brussels for what is estimated to be 19th summit. As Germany started to cave in, in sync with its loss to Italy in the Euro 2012 soccer tournament, markets responded in kind, catching plenty of short positions off guard, and rightly so. After all, when was the last time that this group of bureaucrats has delivered anything concrete. This summit was no different, and only time was bought for Italy and Spain.
The 130 billion euro growth pact is nothing more than a side show, and the financial shuffling replete of impressive titles and acronyms will eventually fall apart because debt is still debt and continues to pile up. If anything, Germany's tough words as of late are being scaled back, and the realization that the end game keeps approaching is forcing the acceptance that Italy and Spain are now in control.
Early in the week, and shortly after Spain submitted a request to bailout its banks, Cyprus cried for help, and is the fifth euro zone country to seek emergency funding from Europe. The bailout will be more than half as big as its 17.3 billion euro economy. Slovenia will be next. Late Monday, Moody's Investors Service downgraded the long-term debt and deposit ratings for 28 Spanish banks by one to four notches, and the parade isn’t over.
The Healthcare law ruling was a botched job by the Supreme Court, as explained by a previous digest.
U.S. Economics: As a good sign of stabilization, new home sales increased to an annual rate of 369,000 from 343,000, the high point in more than two years. However, the median sales price fell 0.6% to $234,500, while the market supply of new homes, based on current sales, fell to 4.7 months from 5.0 in April.
In addition, the S&P/Case-Shiller Home Price Index showed an average home price increase of 1.3% in the month of April for both the 10 and 20-City Composites, a nice break after seven consecutive months of negative readings. But despite of a slight improvement on an annual basis, prices still dropped 2.2% for the 10-City Composite and by 1.9% for the 20-City Composite. NAR’s pending home sales increased 5.9% in May to match a two-year high, although mortgage demand saw a 7.1% drop last week, making the NAR’s data suspect.
Consumer confidence, as measured by The Conference Board, declined for the fourth month in a row to a five-month low of 62 from a revised 64.4 the prior month. In addition, the UoM consumer sentiment continued to tick down with a reading of 73.2 and the lowest for the year.
Manufacturing activity according to the Richmond Fed’s survey turned negative, dropping from 4 to –3. Shipments turned negative as growth in new orders experienced a substantial decline, and employment growth slowed markedly. Durable goods rose 1.1%, the first increase in three months, while excluding the volatile transportation equipment, orders for goods advanced 0.4%, and weaker than expected. Total orders fell 6.8% in the first four months of the year, the weakest showing since the same period in 2009, and during the last recession. Chicago PMI held steady at 52.9.
The final GDP number was unchanged at 1.9%, and very little attention is paid to this data series. Jobless claims decreased by 6,000 to 386,000 in the week ended June 23, while the previous week’s number was revised up to 392,000 from 387,000, keeping the negative employment trend alive.
Consumer spending was unchanged, and the weakest since last November, with lower gasoline prices not helping the cause. The previous reading was revised down to a 0.1% gain from 0.3%. Personal incomes rose 0.2% for a second month in May, mostly due to rental incomes, while wages were flat.
Global Economics: Italians are in no mood to buy anything, with retail sales sinking 1.6%. The drop, the worst in eight years, surprised forecasters that saw a 0.2% decline. Italian retail sales are now down 6.8% in unadjusted terms from April 2011. Retail sales in Germany declined 0.3% after a 0.2% drop the previous month, while French consumer spending rose 0.4% following a 0.7% increase. Euro zone loans to consumers and businesses declined 0.1%, the first drop in over two years.
German inflation eased to 1.7% year-on-year in June from 1.9% in May, the lowest in 18 months, while German unemployment rose a seasonally adjusted 7,000 to 2.88 million. The unemployment rate is now 6.8%, and much better than any European cousin. Euro zone CPI was unchanged at 2.4%.
Japanese retail sales increased 3.6% in May from a year earlier, but the growth rate is lower than a 5.7% rise in the year to April, with private consumption losing momentum. Industrial production decreased 3.1%, although unemployment fell to 4.4% from 4.6%. But manufacturing PMI dropped to 49.9 from 50.7, showing contraction. Household spending increased 4% on year, a bright spot, while core CPI decreased 0.1%, keeping with the deflation theme.
Market Trends: We end the week with a boom, after an agreement of sorts was reached in Europe, and all indices turned short-term positive while managing to turn only neutral from a long-term perspective. Short-term, the dollar turned down and the euro up, while their long-term trends are still positive and negative respectively. The yen parked itself in neutral. Oil finally received a boost on Friday, with WTI and Brent turning positive short-term, while the long-term trend remained negative. As a pure reaction to the dollar, copper and gold are now short-term positive, and of the two only copper’s long-term trend turned neutral. Gold is still negative long-term. Silver doesn’t seem to catch a break, and despite the rise in commodities, it’s still negative all the way around. The 10-year Treasury rate actually declined to 1.66% from 1.67% the previous week, with the 10-year note turning neutral short-term. The 30-year bond is negative short-term trend, although both treasuries are still long-term positive since April. Next week further explanations about Europe’s plans will be interesting to dissect.