Hollande Economic Push Threatened by Minister Account Disclosure - Bloomberg
President Francois Hollande’s effort to ask the French to tighten their belts was dealt a blow this week after the minister he’d charged with fighting tax evasion admitted to a secret overseas bank account.
Jerome Cahuzac, who resigned as Hollande’s budget minister two weeks ago, said on April 2 that he was caught in a “spiral of lies” about the 600,000 euros ($770,000) he held in an offshore account for years. In a rare, unscheduled television appearance yesterday, Hollande said Cahuzac lied to him and the French parliament and that his actions were “unforgivable.” — Bloomberg
Weekly Bull/Bear Recap: Jan. 21-25, 2013
Bull
+ Existing home sales may have underperformed the consensus forecast, but for good reason. A lack of homes for sale (supply), particularly at the low-value end, was the culprit. This development will help maintain upward momentum in home prices throughout 2013. Moreover, New Home Sales may have printed a negative MoM growth-rate, but this was due to a huge upward revision in November and doesn’t deter the bigger picture of continued growth for the sector in 2013. Overall, inventory levels remain very lean. Higher home prices will result in a positive wealth effect for consumers and help support consumption. Furthermore, low inventory levels will act as an incentive for homebuilders to hire, buttressing economic activity.
+ The U.S. job market is clearly on the mend from the looks of the jobless-claims data. At roughly 352K, the 4-week average is now at its lowest level in almost 5 years. This development is a harbinger for a solid January payrolls report, due in a week from today.
+ The bears’ strongest point, a stalling manufacturing sector, isn’t confirmed at all by Markit’s latest preliminary PMI reading. For January, the overall index rose from 54 to 56.1, a 10-month high. Furthermore leading indicators in the report, such as New Orders, point to further expansion in the months ahead.
+ The world’s largest economic bloc, the European Union, is clearly stabilizing. Germany’s manufacturing PMI rises to the highest in almost a year, while consumer confidence in the European region expands for the second month in a row. Both reports are for January. Meanwhile, the ZEW Center for European Economic Research reports that investor confidence in Germany skyrocketed 24.6 pts, hitting a level not seen in more than 2.5 years (same story for Euro-area confidence). Finally on the financial front, investors are giving the thumbs up at recent reforms in Spain and Portugal; both countries issue bonds to strong demand —- meanwhile, many banks that participated in the LTRO at the zenith of the crisis, are now repaying their loans quicker than expected, a sign of confidence that the worse is over.
+ China continues to surprise to the upside. The country’s manufacturing PMI, released by HSBC, hits a 2-year high in January. Furthermore, Copper is about to break out of its multi-year triangle to the upside (see 3-yr view).
+ The Conference Board’s U.S. leading indicator points to strengthening economic growth in the months ahead, rising 0.5% in December. “Housing, which has long been a drag, has turned into a positive for growth and will help improve consumer balance sheets and strengthen consumption,” says Conference Board economist Kenneth Goldstein.
Bear
- Manufacturing has stalled and is looking to contract soon, as the Federal Reserve Bank of Richmond reports that its manufacturing index slumped to a 6-month low in January. This report follows news of weakness in the sector from the New York and Philly Federal Reserve Banks. Housing, which now only accounts for only 3% of U.S. GDP economy will not be able to pick up the slack (manufacturing accounts for 12% according to the National Association of Manufacturers)…
- …furthermore consumption, which accounts for roughly 70% of the economy is set to shift down a gear as consumers hunker down as they face an expiring 2-year payroll tax holiday. Bloomberg’s Consumer Comfort, which confirms recent falls in the University of Michigan and Conference Board consumer confidence surveys, falls to a 3-month low.
- Complacency reigns in Euroland as Draghi states that the darkest times have passed. Are we really out of the woods? Investors are ignoring worrisome developments. Spanish unemployment hits a record high while stories of corruption within the country’s government swirl about, creating political uncertainty at the flashpoint of the debt crisis. Meanwhile in France, Europe’s second largest economy, recession is knocking on the door and could result in another flashpoint.
- From a technical perspective, stocks are very overbought at these levels. Now is not the time to make risk-on bets as the S&P 500 also approaches multi-year resistance and many macro risks remain lurking in the background.
—(Source Bespoke Investment Group)
- Common sense says that constant intervention and warping of financial markets by central banks will inevitably come back to haunt investors and the global economy. Warnings grow of a credit bubble as rampant central bank intervention has masked the true cost of money. The subsequent adjustment will undoubtably be painful.
Weekly Bull/Bear Recap: Turkey Week Edition, 2012
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
Bull
+ Uncertainty is decreasing. In last week’s recap, the bull’s strongest case was the “the contours of a resolution” taking shape regarding the fiscal debate in Washington. This week, more investors bought into this bullish point, leading to the S&P 500’s best weekly performance since June. In geopolitical news, a cease fire has been declared in Gaza. Decreasing conflict in the region means cooler heads are prevailing.
+ Risk markets are ripe for a tradable bullish move given that the S&P 500 is extremely cheap when looking at current P/E ratios. In fact, it would need to rally 26% just to reach the average P/E of bull markets dating back since the 60s. Meanwhile, trends in insider trading are hinting at a sustained rally to come. Mainstream investors are entirely too pessimistic on longer-term earnings growth, yet sources of future growth are around us….
+ …global growth will be the recipient of a welcomed surprise in China, where a rebound is gaining strength as per HSBC’s latest PMI reading, increasing to 50.4 from 49.5 and marking the metric’s first expansionary reading in more than a year. Meanwhile, “The German economy is holding up well in face of the euro crisis” and ECB officials signal that the central bank is willing to forgo $9 billion in future profits on its Greek holdings, a sign of understanding that some relief will need to be given to periphery countries.
+ …meanwhile, U.S. economic growth will be increasingly supported by a rebounding housing market. The National Assocation of Homebuilder’s Housing Index rises to a 6 and a half year high. Existing home sales for October surprise to the upside and upward pressure in home prices may be the reason for improving consumer confidence (Source: Econoday). Rising Housing Starts indicate that the housing industry is becoming more confident in the recovery. Meanwhile in manufacturing, Markit’s U.S. PMI report certainly doesn’t agree with the bearish claim that the sector’s is about to enter contraction. Finally, U.S. officials understand that today’s globalized economy is about competition and are considering establishing laws to encourage the brightest minds in the world to consider the U.S. as their home.
Bear
-Investors are like frogs in an increasingly hot investment environment. Europe continues to show signs of disunity and infighting as EU finance ministers are unable to agree on a revised version of Greece’s fiscal consolidation plan or approve to extend the country’s public debt target. Meanwhile France’s AAA rating is history as per Moody’s. Increasing investor skepticism doesn’t bode well for lawmakers as eventually financial markets will force the issue. Finally, economic and financial data is just awful.
- Confidence in the global recovery is evaporating. U.S. Tech companies are feeling the effects of a slowing global economy. Meanwhile, China reports that foreign investment in the country has fallen for 11 of the last 12 months. If bulls are certain that China is poised to rebound, why has the Shanghai Index dropped to a new low? Meanwhile, Japan reports a 6.5% plunge in October exports (exports to the EU cratered 20% YoY)
- As if critical damage due to a slowing global economy wasn’t enough, the U.S. economy is also contending with a crisis of confidence due to Fiscal cliff concerns. Investment is falling off a cliff as companies pull back on business spending. The consumer better step through this holiday season (early signs aren’t promising). Despite a higher trend in Michigan’s Consumer Sentiment index, weakening momentum is causing alarm.
- Cooler heads may seem to be prevailing in the Middle East, but the longer trend is of more hostility. Meanwhile tensions in Asia remain elevated and territorial claims dealing with the South China Sea are likely to exacerbate fissures in the region.
Weekly Bull/Bear Recap: Nov. 12-16, 2012
This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases.
Bull
+ Weak economic data and fiscal cliff concerns have produced a buying opportunity for risk assets. Firstly, weakness in this week’s economic data is due to Hurricane Sandy. Data will revert to trend growth soon and surprise investors to the upside. Finally, we are beginning to see the contours of a resolution as per recent remarks from Obama and Boehner. Democrats will pile the pressure on Republicans to relent. Lawmakers understand the consequences of non-action and will naturally act in time to avoid the bearish scenario.
+ Long-term U.S. economic bullish tailwinds are forming before our eyes. Shale oil and “fracking” look to make the U.S. an energy powerhouse, spawning a wave of manufacturing investment and job creation. The U.S. is forecast to be an oil exporter by 2030. Furthermore, the housing market is on the mend with housing bellwethers reporting improved earnings trends, economic data showing falling inventory levels, evidence of an improving trend in delinquencies, and leading indicators such as the S&P Homebuilders index and lumber prices signaling increased vigor ahead. Finally, China continues to show stabilization; a rebound will ensue in 2013. Longer-term, new leadership will ensure that the country’s important 5-year plan is properly executed. These bullish tailwinds will grow stronger in the coming months and will cause a further uptrend in Citi’s Surprise Index (a measure of investor sentiment)…
+ …In fact, sentiment on Main Street continues to improve and U.S. economic growth quietly surprises to the upside in the 3rd quarter.
+ Athens will likely be given additional time to digest austerity cuts. European leaders understand that they must give Greece time to adjust. This is a positive step and shows that political will for a unified Europe remains resilient. Furthermore, GDP data for France, Germany, and Italy print better than expected.
Bear
- U.S. companies fear the fiscal cliff and government gridlock is set to continue, all the while bailouts persist. Falling core capital goods orders (affecting manufacturing), souring small business sentiment, and weakening consumer spending are ingredients for a self-fulfilling prophecy of recession. Promises of further monetary easing are met with risk markets shrugging. Monetary policy has become powerless to stop continued economic weakness.
- Germany will be entering recession soon. The important ZEW survey implodes in November, falling 4.2 points to -15.7. A negative balance indicates that more experts expect the economy to contract over the next 6 months. A political crisis in the Eurozone is increasing in probability. How can Germany bailout other countries when it now needs stimulus of its own? That will be a major question on November 20th when the Bundestag votes on the next tranche of aid to Greece.
- Meanwhile, things are taking a turn for the worse in most if not all of Europe. For September, Spanish industrial orders collapse almost 6%, while Eurozone industrial production falls the most in 3 years. In France, recession is knocking on the door and Germany is pondering critiquing the country’s economy (good luck with that). Meanwhile, most periphery nations are plagued with increasingly violent strikes and protests; the Greek government is beginning to lose control as a GDP print of -7.2% in the 3rd quarter has prompted the Prime Minster to announce that a “Great Depression” has descended on the country. The IMF and EU continue to spar over the details of a new aid package —wavering IMF support is further fuel for uncertainty.
- Weakness in Europe is spilling into Asia, with Japan on the cusp of another recession and Taiwan experiencing some intense market declines. Meanwhile, geopolitics is further clouding the outlook. Israeli airstrikes kill the leader of Hamas’s militant wing. This is occurring within the backdrop of already high tensions in the region; a report from an U.N. agency fuels further fear of military conflict between Israel and Iran.
French Business Confidence Stays Close to Two-Year Low: Economy - Bloomberg
French industrial confidence remained near its lowest in two years in August, increasing pressure on President Francois Hollande’s government to revive growth in the face of Europe’s debt crisis.
Sentiment among factory executives rose to 90 after July’s reading was revised down to 89, national statistics office Insee in Paris said in a statement today. That’s in line with the median of 20 forecasts in a Bloomberg News survey. A gauge that includes retailers, builders and service industries was unchanged at 87, the lowest in almost three years. — Bloomberg
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Continued news of this shade will intensify the developing rift between periphery nations, lead by France and core nations such as Germany, Finland, and the Netherlands.
Hollande will come under increasing pressure to call for ECB assistance, but likely as a prerequisite for greater integration. Germany, on the other hand, wants integration and ceding of sovereignty before the monetary spigot gets turned on.
Hollande Pressure on Peugeot Seen Limited by Mounting Losses - Bloomberg
French President Francois Hollande says PSA Peugeot Citroen (UG)’s plan to close a factory and slash 14,000 jobs won’t be tolerated. History suggests otherwise.
In the last major clash between a sitting French president and a company over corporate downsizing, Hollande’s predecessor Nicolas Sarkozy vowed in 2008 that an ArcelorMittal (MT) plant in northeastern France would never close and jobs would be saved. A year later, the world’s biggest steel company shut the factory.
Hollande, elected in May after pledging to block a “parade of firings,” said July 14 he would lean on Peugeot to rework a plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector. — Bloomberg
Weekly Bull/Bear Recap: Jun. 25 - Jun. 29, 2012
Bull
+ EU leaders agree to use the EFSF/ESM to conduct direct bank recapitalizations. They also consent to institute a Eurozone-wide banking regulator. These are the first steps toward fiscal union. Officials are also finally focusing on a more concerted growth agenda for the Eurozone. Roughly $150 billion will be allocated to help small business and youth unemployment. Finally, the seniority issue that would have affected Spanish bailout loans from the ESM has been lifted. European leaders are resolute in their efforts to end the Eurozone crisis. Given low sentiment for any progress from the summit, this news will lift sentiment and risk markets in the weeks to come. Spanish and Italian bond yields plunged after news of the accord. Now is the time to buy as uncertainty is lifted.
+ Housing continues to improve, helping job creation, ameliorating consumer confidence, and ultimately boosting consumption. New Home Sales improve to their best reading in almost 2 years in May and inventory falls to 4.7 months, the lowest since late 2005. Pending Home Sales, a leading indicator, notches a 2-year high, increasing 5.9% in May and 13.3% YoY. MoM home prices, as per the Case-Shiller index, rise in April for the first time in 8 months the gains are broadbased; YoY rate falls at the slowest pace since 2010. Lennar posts strong growth trends in home sales.
+ “Beautiful Deleveraging“ is in its latter stages. Furthermore, government officials understand that fiscal accommodation must continue. There will be no fiscal cliff, but instead a gradual and delicate withdrawal. Gas prices are plunging as is inflation in general; the PCE price deflator notches its slowest rate of gain since Jan ‘11. This is a direct help to consumer finances. Bloomberg’s Consumer Comfort survey just hit a 2-month high. Bullish economic tailwinds are strengthening.
+ The global economy is proving more resilient than the bears expect. In Asia, China’s trade ministry indicates that trade is beginning to stabilize after a rough patch earlier in the year. Also, the housing crash that the bears relentlessly warned about looks to be delayed, keep waiting bears. Taiwanese Industrial Production falls much less than expected in May, while Singaporean’s metric rises a higher than expected 6.6% YoY.
+ Weakness in manufacturing is only a soft-patch, not pervasive, and is stabilizing. Durable Goods Orders rise more than expected, while the Dallas and Chicago Fed both report improvement. Seasonally adjusted jobless claims may be elevated, but unadjusted claims are actually 9.4% lower than a year ago, “suggesting that the trend is still one of gradual improvement in the economic fundamentals.”
+ Even Europe had pockets of good economic news. German and French consumers remain resilient in the face of Eurozone issues. Reports surface that capital is returning to Greek banks after the election reinforces Greece’s commitment to stay in the Euro.
Bear
- The Eurozone is imploding in front of our eyes.
- Confidence is vanishing. With declining confidence, the crisis is becoming a self-fulfilling prophecy.
- Cyprus is downgraded to junk by Fitch and becomes the 5th Eurozone member to request a bailout (ironically, they assume the EU rotating presidency this coming Sunday).
- More mass downgrades for Spanish banks as the country requests a bailout from the Eurozone, all the while capital controls are surreptitiously set up and rumors of Junk status for Spanish bonds swirl about.
- 4 days on the job and the Greek finance minister quits.
- Merkel and finance minister Schaeuble say “nein” to shared liabilities “as long as they live.” Meanwhile, Egan-Jones does its best to add even more pressure on Merkel to not succumb to the government troika of beggers in Italy, France, and Spain and damage the county’s credit profile. Meanwhile, the crisis creeps into Germany’s economy as unemployment climbs more than expected in June.
- Italian retail sales plunge the most in “at least 8 years,” cratering 1.6% MoM and 6.8% YoY in April vs. expectations of -0.6% and -0.2% respectively. The LTRO, implemented last year, is beginning to “yield” negative consequences, by accelerating bank insolvency due to dangerous concentrations of toxic sovereign debt.
- The cause of the Eurozone crisis is the ongoing policy of austerity aimed to correct trade and budget imbalances. Today’s announcement solves nothing to this end and is just another band-aid (slated to be ready by 2013, subject to German conditions, and not even big enough). European leaders are moving at a snail’s pace; Eurobonds are still a ways off. It is clear that this strategy is fraught with implementation risk. Finally, a $150 billion stimulus package isn’t going to restore growth for a roughly $16.2 trillion dollar economic bloc with a strong downward growth trajectory. Economic data will get worse and it will be obvious that European officials won’t have 4 months to take another baby step.
- Tensions are really heating up in the Middle East. Nuclear talks in Russia between the West and Iran yield no resolution, leading Netanyahu to remind us that a military strike may occur in the near future. Meanwhile, Syria downed one (almost another?) of Turkey’s reconnaissance jets last week in international waters leading Turkey to seek a response from NATO and warn Syrian forces to back off its borders or else. Psst, check out what’s going on in the South China Sea.
- More indications point to more than just a soft-patch for the U.S. economy. The Chicago Fed National Activity Index’s 3-month average falls to the lowest in almost 1 year and marks the third consecutive reading below zero. The Richmond and Kansas City Fed both report weakening manufacturing conditions. Conference Board’s Consumer confidence index slumps to a 5-month low (confirmed by both the Gallup Poll and UMich = 6-month low). Jobless claims remain elevated.
- Earnings are starting to feel the effects of the global slump and economically important companies (not to mention the government) are sounding the alarm, yet investors remain convinced that monetary policy can cure all ills. Is it really a wall of worry as the bulls claim?
Chancellor Angela Merkel hardened her resistance to euro-area debt sharing to resolve the region’s financial crisis, setting Germany on a collision course with its allies at a summit of European leaders this week.
Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.
“It’s not a bold prediction to say that in Brussels most eyes — all eyes — will be on Germany yet again,” Merkel said. “I say quite openly: when I think of the summit on Thursday I’m concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures.” — (via Merkel Hardens Resistance to Euro-Area Debt Sharing - Bloomberg)
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As I mentioned here, markets will be very sensitive towards German comments on debt sharing and the possibility of a banking union.
This piece of news likely initiated today’s sell off. Bailout requests from Spain and now Cyprus is only gas for the fire.
NFIB small-business index at post-recession high - MarketWatch
Couple this news with yesterday’s Employment Trends Index (another post-recession high), stabilizing home prices and consumer confidence and the case for a continued U.S. economic recovery remains viable.
However, with Europe taking a drastic turn for the worse in recent days and Germany now finding itself ostracized, it feels like the union is facing its fiercest test yet. Germany must relent to Eurobonds so that trade and budget deficits in peripheral countries are recycled by German surpluses.
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“Germany is pursuing a “balance-of-payments (BOP) recalibration” by forcing these nations to become surplus countries. This involves increasing competitiveness via internal wage deflation (i.e. cutting costs), in an effort to drastically reduce or eliminate their trade deficits. It also requires that governments eliminate their budget deficits by raising taxes and undergoing austerity. As long as German-mandated austerity persists, the probability of a Eurozone split up will increase. These policies are resulting in deep recessions and are tearing apart the social fabric of Europe. Resentment towards Germany and the financial elite is becoming engrained in the psyche of regular citizens in the periphery. Remonstrations are progressively intense. Like trends in financial markets, psychological trends aren’t linear. We are currently in a lull and protests are likely to pick up in the coming months, as the effects of austerity harshly bite Main Streets of periphery countries. Unfortunately, these countries are only in the middle innings of this BOP recalibration, at best; more pain lies ahead. Political risk remains extremely elevated. Furthermore, existing government and private debt is so large that debt traps are becoming evident in Greece, Portugal, and Spain. They in turn will lead to further austerity and worsening political and social trends, a nefarious feedback loop.”
—- RCS Investments Macro Outlook (Begn-2012) —January 16, 2012
Schaeuble Says Germany Will Negotiate With Hollande on Growth - Bloomberg
The German government will allow a victorious Francois Hollande to “save face” while expecting him to uphold French commitments to Europe’s budget treaty, Finance Minister Wolfgang Schaeuble said.
Schaeuble’s comments are the clearest indication yet that Chancellor Angela Merkel’s government is preparing for a Hollande victory at France’s presidential election May 6 after publicly backing Nicolas Sarkozy to win a second term. Earlier today, the German government said that diplomatic contact had been made with the Hollande camp.
“We’ve told Mister Hollande that the fiscal pact has been signed and that Europe works along the principle of pacta sunt servanda,” meaning agreements must be kept, Schaeuble said in a speech in the western German city of Cologne today.
“I’ve said that everybody who gets freshly elected into office must be able to save face,” Schaeuble said. “So we will discuss this with Hollande in a very friendly way. But we won’t change our principles.” — Bloomberg
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(RCS): “We won’t change our principles.” Ie. We’ll give away here and there, but no Eurobonds, nor a backtrack of austerity. That’s how I see Schaeuble’s comment.
Needless to say, eventually (and soon I believe), economic conditions will bring this fundamental difference in austerity vs. growth between Germany and France front and center.
Hollande pressed the advantage today, telling a rally in Quimper on the Brittany coast that a Socialist victory would “be the end of imposing austerity everywhere, austerity that brought desperation to people throughout Europe.” (via Europe’s Austerity Backlash Gathers Steam in Merkel Test - Bloomberg)
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So what if everyone begins to gang up on Germany and her austerity measures? Like I wondered here roughly 7 months ago, it may be Germany that decides to leave as it announces an emphatic “Nein” against loose fiscal and monetary agendas.
Some Overnight Econ Data
- German Exports Rebound in January (Note that the headline is misleading; Some bad news on Italy and France is thrown in there).
- Drop in UK Industrial Output Reignites Recession Fears
