Global Economic Stress Intensifies
Saturday, July 07, 2012
The European Central Bank cut the minimum bid rate by 25 basis points to a record low of 0.75%, while China lowered its one-year yuan deposit rate 25 basis points and its one-year lending rate by 31 basis points. The Bank of England kept rates unchanged at 0.50%, but pumped another 50 billion pounds into the “economy,” bringing the total size of the program to 375 billion pounds.
ECB President Mario Draghi justified the cut due to economic weakness, as if 0.25% will convince borrowers to pile up at their nearest bank. The statement below was captured by MNI, and can be translated into “we’re stuck,” while failing to address the pretentiousness that European bureaucrats and politicians have control over the outcome of the European debacle.
"We didn't discuss any other non-standard measures. Quite unusually for my standards I will also tell you why we didn't discuss this," Draghi said. "We have to have non-standard measures which are effective and they have to be effective in an area which is fragmented," he explained. "It is not obvious" that there are measures that can be effective in such a highly fragmented environment, he explained.”
Lower rates in Europe opens the door for capital to flow elsewhere, something the European Central Bank’s former chief, Jean-Claude Trichet, had been avoiding. Denmark also dropped rates by 25 basis points, and the new rate of –0.20% for certificates of deposit is now a cash storage fee.
U.S. ECONOMICS: To start off the week, the ISM’s manufacturing index (PMI) for June came in at 49.7, down from 52.1, indicating manufacturing contraction. New orders sunk to 47.8 from 60.1, while prices dropped substantially to 37 from 47.5. The services PMI version declined to the weakest level since January 2010, with the index falling to 52.1 from 53.7 in May.
Construction projects increased 0.9% in May, the largest increase of the year. In addition, April construction spending was revised up to a 0.6% increase from 0.3%. An increase in private construction was partially offset by weakness in the government sector, and state and local government spending fell 1%, the fifth consecutive decline. Meanwhile, mortgage rates hit record lows again, with the 30-year fixed-rate mortgage average falling to 3.62% from 3.66% the prior week, and almost 1% below the rate one year ago. The 15-year dropped to 2.89% from 2.94%.
Factory orders rose 0.7% following a revised 0.7% decline from 0.6%, leaving the series virtually unchanged, and hardly a reason to exhale. Total annualized vehicle sales rebounded to 14.1 million from 13.8 million, but the overall theme paints a weakening market that is still very short of the 15.1 million units registered in March.
On the job front, the good news was that jobless claims declined by 14,000 last week to 374,000, the lowest level in six weeks. However, claims from two weeks ago were revised up to 388,000 from 386,000. The much awaited jobs report delivered a weak 80,000 jobs in June, leaving the fictitious unemployment rate unchanged at 8.2%.
GLOBAL ECONOMICS: China’s manufacturing expanded at the weakest pace this year as new orders and export demand dropped. The official PMI fell to 50.2 in June from 50.4 in May, and was the lowest since November. More pronounced decreases in output were registered by HSBC’s final PMI for China, which registered a 48.2 reading.
Often overlooked, Australia manufacturing activity contracted for the fourth month in a row in June, though at a slower pace than in May, with the index rising 4.8 points to 47.2 in June, after easing 1.5 points in May. Australia's rate of inflation dropped to the lowest level since the global financial crisis, putting pressure on the currency. Annual inflation rate fell to 1.6% in the 12 months to June 2012.
The Eurozone’s unemployment rate was 11.1% in May 2012 — a record high — compared with 11.0% in April, and 10.0% one year ago. The Producer Price Index (PPI) fell to +2.3% in May, the lowest in two years, from +2.6% in April as deflationary pressure continues to build due a slowing economy and a drop in oil prices.
June PMI data for the Eurozone shrunk for the eleventh successive month, with production and new orders registering severe contractions, leading to the steepest job losses since January 2010. At 45.1 in June, unchanged from the previous month, the final Markit Eurozone Manufacturing PMI was up slightly from its earlier flash estimate of 44.8. Important to note due to debt issues, Italian manufacturing production levels and employment decreased at faster rates, as incoming new business in the sector again fell sharply. German industrial output rebounded 1.6% from April, when it declined 2.1%. Eurozone Services PMI also contracted with a 47.1 reading, while retail sales increased 0.6% after a revised drop of 1.4% from 1.0% the previous month. Final Eurozone GDP was unchanged at 0%.
MARKET TRENDS: Unlike last week, we ended with a bust, although not quite enough to turn the tables yet. As Europe still grabs headlines, mostly reflecting rumors and opinions of what should be, not what is, the U.S. jobs report left a lot to be desired. Major indices remain positive short-term and the long-term neutrality prevails. The dollar rallied, especially after the ECB’s rate cut, and then rallied some more because the expectation of QE3 is fading for now. The euro dropped like a stone, and word that money market funds held by major investment banks will no longer accept euro deposits does not bode well for the currency. Dollar is positive and euro negative all the way around. The yen is neutral short and long-term for the time being, and indecisive for over one month. After oil rebounded on Iran, reality manifested itself once again, and some positive ground was lost. Yet, both WTI and Brent hold short-term positive trends, while their long-term trends are still negative. Gold and silver look like two lost puppies, and continue to flip along the x-axis of $1,600 and $28 respectively. Copper turned short-term neutral. The 10-year Treasury rate declined further this week to 1.54% from 1.66% the previous week, with the 10-year note and 30-year bond turning positive short-term. Both treasuries have been long-term positive since April. Next week is replete with speeches by central bankers, and everyone will be looking for clues.