Greece Gets Giddy, Fed Disappoints
Saturday, July 14, 2012
The word out of Greece is that the economy will contract an astonishing 6.9% this year, pushing the budget deficit to 9% of GDP. Projections show that unemployment will exceed 23%. The previous forecast released in April was for an annual contraction of 5%, with unemployment at 19.7%
While Germany’s Constitutional Court decides on the ESM, Italy stated that it may want, or need, to seek aid due to escalating borrowing costs. Moody’s downgrade on Thursday didn’t help the cause. Spain received an extension of one year to reach its deficit targets, and the first €30bn in aid from the Eurozone should arrive by the end of July. However, additional stress tests for 14 of Spain’s largest financial institutions will be followed by a requirement that a “bad bank” be created to take in “distressed assets” — and that may include the whole country.
The Federal Reserve’s lack of cohesion on QE3 riled the markets, although Fed officials want to develop "new tools" to combat an anemic economy, and maybe even file an international patent in case other central banks want to license the technology. However Atlanta Fed President Dennis Lockhart stated on Friday that his "support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013." In short, he's open to QE3 just in case the patent is denied.
The BRIC story keeps on giving and, as stated before, they can barely help themselves, much less others, while the talk of the BRICs saving the European debt crisis has virtually disappeared. China’s GDP slowed, and Brazil lowered rates to 8%, the eighth consecutive reduction in 11 months, while inflation keeps on dropping — a very unusual event in Brazil — reaching 4.92%, and the lowest point in almost two years. The Selic interest rate was 12.5% in August of 2011.
U.S. ECONOMICS: Consumer credit increased by $17.1 billion in May, the largest expansion since December 2011, and the 9th consecutive gain in consumer borrowing. Credit card debt rose by $8.0 billion after a $3.5 billion drop in April. Non-revolving credit, such as auto loans, personal loans and student loans jumped $9.1 billion after a $13.4 billion increase the prior month, with student loans always leading the pack, and not in line with the labor market stats.
The trade deficit shrank 3.8% to $48.7 billion from $50.6 billion in April, due to lower oil prices and weak consumer demand. Imports fell to the lowest level in three months, while exports climbed to the second- highest on record. Import prices dropped 2.7% with oil contributing heavily, after a 1.2% decrease in May. Export prices fell 1.7% in June, following a a 0.4% drop the previous month. The June import price drop was the largest monthly decrease since the index fell 4.6% in December 2008. The export year-on-year price decline was the largest 12-month drop since a drop of 3.6% between October 2008 and October 2009.
Wholesale inventories increased 0.3% to $484.1 billion. Durable goods, such as autos, computer equipment and machinery, rose 0.6%, while petroleum stocks fell 3.6%. Sales fell 0.8%, mostly due to a 4.7% decline in petroleum sales, and it was the sharpest decrease for both readings since March 2009. Jobless claims contracted 26,000 to 350,000, with the previous week's figure being revised up to 376,000 from 374,000.
PPI increased by 0.1% after 1% percent decrease the prior month. The core measure, excluding volatile food and energy, increased 0.2%, the same as last month. The UoM/Reuters consumer sentiment index dropped to 72 from 73.2 in June, adding to the “thinking” that QE3 is around the corner. Inflation expectations declined to 2.8% from 3.1%, the lowest in 18 months.
GLOBAL ECONOMICS: German exports rose 3.9% from April, when they fell 1.7%. Imports increased 6.3%, and the trade surplus increased to 15.3 billion euros from 14.5 billion euros in April. Current account surplus was 9 billion euros, a reduction from 11 billion euros the previous month. German WPI declined 1.1% and French CPI was unchanged. Eurozone industrial production increased 0.6%, while the previous month was revised down to –1.1% from –0.8%.
Japan’ Core Machinery Orders dropped considerably by 14.8% on a month-to-month basis, the largest contraction since January 2009. Japan's current-account balance narrowed in May by $2.7 billion due to a wider trade deficit.
China’s CPI was 2.2%, the lowest in over one year, while the PPI was –2.1% and has been accelerating to the downside for the last four months. China’s imports rose less than projected, while export growth slowed, adding pressure on the government to support expansion after inflation data showed demand softening. Imports increased 6.3% from a year earlier, short of the 11% estimate. Exports gained 11.3%, and the trade surplus rose to a three-year high of $31.7 billion.
China’s new loans totaled 920 billion yuan, compared with 793 billion the previous month, and after the central bank cut interest rates for the first time in more than three years. China’s GDP clocked 7.6%, the lowest in three years, while retail sales gained 13.7%, and short of the 17%-18% rate in 2011. Industrial production increased 9.5%, or half of the rate throughout 2011. Fixed asset investment rose 20.4% and better than 20.1% the previous month, but slower than the typical 25% experienced in 2011.
MARKET TRENDS: An end of week rally killed plenty of short positions, and we find ourselves with a neutral market, having tested the short-term negative side on Thursday. China’s GDP wasn’t as bad as expected, and since it’s “official,” it must be good. The dollar continues to attract investors, while the euro endures a long slide, pointing to capital outflows. The yen kept its neutral position, both short and long-term. WTI and Brent oil have rebounded off the lows and are both positive short-term, while their long-term trends continue to be negative. Gold and silver are still struggling for direction, confronted with hints of instability and deflationary pressures. Copper’s short-term trend finally broke to the upside, with the long-term picture depressed for now. The 10-year Treasury rate declined again to 1.50% from 1.54% the previous week, with the 10-year note and 30-year keeping their positive short and long-term trends. Next week earnings will start pouring in, and Europe will provide some more entertainment as the Spanish bailout unfolds further.