Spain Aims For 4th Place In Bailout Race
Saturday, June 09, 2012
Ben Bernanke failed to feed speculation that additional stimulus will be forthcoming, and stated that “the Federal Reserve stands ready to act to protect the financial system and the economy in the event that financial stresses from the European crisis escalate.” Good to know!
Over the weekend, and according to Reuters, Spain will become the fourth euro nation to formally request a bailout — or “rescate” in Spanish which also means “ransom” — to support its banks. The announcement will probably come after a conference call on Saturday between Eurozone finance ministers. The impact of such an event on the market is an unknown because while a financial patch is being delivered, there’s also an acknowledgement that the majors are crumbling.
On Thursday, Fitch Ratings downgraded Spain to BBB from A, with a negative outlook, or just a step from junk status. In addition, Fitch downgraded 11 Spanish local and regional governments and five credit-linked public sector entities. Reaching deep into the safe zone, on Wednesday Moody's cut the credit ratings of six German banking groups and Austria's three largest banks, further highlighting the contagion risk. Then late Friday, Moody's said that developments in Spain and Greece may prompt downgrades of other European countries, without exception, I may add.
U.S. Economics: Factory orders dropped 0.6% in April, and declined a revised 2.1% in March, down from -1.5%, while durable goods were unchanged in April. Orders for nondurable goods sank 1.1%. The Institute for Supply Management's services-sector index rose to 53.7 in May from 53.5 in April, adding a bit of positive news.
Productivity dropped 0.9% in the first quarter, compared to an initial estimate of a 0.5% decline. Output - the amount of goods and services produced - was revised down to a 2.4% increase from 2.7%, and the increase in hours worked was revised up to 3.3% from 3.2%. Thus, unit-labor costs rose 1.3% in the first quarter instead of the original 0.9%, and adjusted for inflation, hourly wages fell 2.0%. Jobless claims fell by 12,000 last week to 377,000, while claims from two weeks ago were revised up to 389,000 from 383,000, which is still elevated.
Mortgage rates don’t seem to find a bottom, with a new 30-year fixed record low of 3.67% from 3.75% in the prior week. One year ago the rate was 4.49%. The 15-year fixed-rate mortgage also kept heading south with a new record low of 2.94%.
The almighty U.S. consumer credit grew by a less than expected $6.5 billion, the smallest increase since last October. Credit growth in March was revised substantially down to a gain of $12.4 billion from $21.3 billion, while student loans continue to account for the majority of the credit expansion. The trade deficit declined to $50.1 billion, with imports and exports declining in April after hitting record highs in the prior month. Exports dropped 0.8% and imports declined 1.7%.
Wholesale inventories increased in April at a faster pace than the prior month, with the 0.6% gain following a 0.3% increase in March. Sales climbed 1.1% in April after rising 0.4% a month earlier.
Global Economics: The ongoing rate cuts by central banks to devalue currencies continue, with the Reserve Bank of Australia cutting its key cash interest rate to 3.5%, although Australia’s economy grew 1.3% from the previous three months, when it rose a revised 0.6%. China also cut its rate by 25 basis points to 6.31%, and it’s much ado about nothing.
European retail sales dropped 1% from March, when they expanded 0.3%, while dropping a larger 2.5% from one year ago. German manufacturing orders fell by 1.9% from an upwardly revised gain of 3.2% in March, and were 3.8% lower on the year. The decline was driven by a 3.6% drop in orders from abroad, with consumer and capital goods declining 5% and 3.3% respectively.
Industrial output in Germany and Spain fell faster than expected in April, highlighting ongoing economic weakness, with German output dropping 2.2% and Spain's slumping 8.3% on year. Meanwhile, Eurozone Q1 GDP was flat on quarter, but was revised to -0.1% for the year. The ECB decided to keep rates unchanged at 1.00%, while lowering rates will do little economically, and will only stimulate the capital outflow from the euro, which the ECB does not need.
Japan's current account surplus dropped from one year ago, due to the slowdown in China. First quarter economic growth was revised up to 1.2% from the initial 1.0%. China’s inflation fell to 3.0% from 3.2%, and the PPI dropped 1.4% vs. –0.7% last month, and the it was the third consecutive negative reading, last seen in 2009. Chinese retail sales increased 13.8%, the lowest since 2007.
Market Trends: Once again markets are short-term neutral from negative, while keeping the long-term negative trend intact, and slowly building on the rebound as the dollar and euro also find themselves in neutral, and awaiting European developments. The yen slumped as safety requirements diminished, and commodities continue to take a beating, after rebounding from oversold levels. WTI and Brent oil are now down 7% and 15% respectively for the year, and their negative trends are still in play. Copper is getting closer to the $3.25 mark, closing at $3.28 and still negative short-term. Gold and silver bounced and turned positive for a day, and then found their neutral zone and ended the week below $1,600 and $29 respectively. The 10-year Treasury rate rose to 1.63% from the 1.47% last week, and while short-term trends are neutral for the 30-year treasury and negative for the 10-year, long-term positive trends are holding. Overall there are plenty of neutral readings and a resolution will be forthcoming next week.