Merkel’s Italian Holiday Fans Europe’s North-South Crisis Flames - Bloomberg
German Chancellor Angela Merkel’s vacation in Italy threatened to inflame Europe’s north-south tensions after she was snapped in a bathing suit by paparazzi and challenged by a regional leader to heed the economic woes around her.
Merkel’s deputy spokesman, Georg Streiter, had to respond to reporters’ questions in Berlin yesterday about whether the chancellor had witnessed “anti-German” sentiment during her sojourn on the island of Ischia, and if she had felt insulted by the video message made by the Campania region governor. Saying she felt “very comfortable” on Ischia, Streiter made it clear Merkel was unhappy about being photographed without her consent. — Bloomberg
Weekly Bull/Bear Recap: Dec. 3-7, 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
+ The U.S. economy is showing resiliency and leading indicators are pointing to continued growth:
- The Institute of Supply Management’s Non-manufacturing survey indicates that the service sector, which accounts were roughly 80% of the U.S. economy, is starting to pick up steam. New orders, a leading indicator, rise from 54.8 to 58.1. (50 demarcates expansion/contraction). Furthermore, order backlogs cross the 50 mark into positive territory.
- The US consumer continues to defy bearish forecasts. Car sales rise to a five-year high in November, despite fiscal cliff fears. A clear uptrend has been reestablished.
(Source: Motor Intelligence)
- Corelogic announces that prices in October rose 6.3% year-over-year, the largest increase since 2006. Plunging inventory will lead to firming prices over the coming year.
- The BLS Payrolls November report today shows a decrease in the unemployment rate to 7.7% (the lowest since December 2008) as well as a better than expected 146,000 jobs created. Averting the fiscal cliff (lawmakers will come to an agreement; Republicans will relent) will result in a release of pent up business investment, resulting in accelerated growth this coming spring. Stock markets are sniffing out this strengthening tailwind.
- Finally, resilient economic growth in the U.S. is spilling into Mexico, evident by rising consumer confidence and improving business conditions.
+ There are more signs of a bottom in China’s economic growth. The National Bureau of Statistics releases its Non-manufacturing Purchasing Managers Index, which increased to a 3-month high of 55.6 and doing its best to emulate a 13-month high mark in HSBC’s manufacturing PMI as well as a 7-month high in the country’s official Manufacturing PMI. Meanwhile, the property market has clearly stabilized; there is no housing bubble. Bellwether companies, such as Dow Chemical, see signs of reacceleration. Stabilization in China and resiliency in the U.S. is translating to a healing global economy.
+ In Europe, periphery sovereign paper has been quietly rallying. The Italian 10-year yield is now in a clear downtrend (3-yr view); a major potential bearish catalyst is falling by the wayside. Europe continues to muddle towards a resolution. Furthermore, when looking at Germany’s DAX, it sure doesn’t look like the wheels are falling off the engine of European growth.
+ Longer-term, rising wages in China, increased flexibility of U.S. labor unions, and rising transportation costs are various factors resulting in a wave of “onshoring.” Meanwhile, the Department of Energy announces that oil production is now the highest in almost 15 years, while a highly anticipated report on natural gas exports sets the stage for a significant increase in investment. These factors will act as steady secular tailwinds for economic growth in the years ahead.
Bear
- Investors are ignoring a growing divide between Democrats and Republicans on how to resolve the Fiscal Cliff and growing uncertainty is resulting in a precipitous drop in business investment, eerily similar to 2008.
— (Source: Briefing)
- Bullish investors’ hopes that the worse has passed in Europe is pure poppycock. Eurozone retail sales sink 1.2% in October, while a slew of PMIs continue to show deep contraction; worse, austerity looks to proceed. Moreover Germany, the locomotive of European growth, presents a terrible batch of economic data this week: industrial production is now cliff diving, retail sales plunge 2.8%, and the Bundesbank chops its growth forecast for 2013 (but the weakness is temporary…..riiight <sarcasm>). Contagion hits Finland, a country already skeptical of continued bailouts to the South, while in the UK, dreadful factory data raises fears of a triple-dip recession. In Greece, more than 1 out of every 4 people are unemployed, while France’s unemployment rate hits its highest level in 13 years (youth unemployment hits a record high). Finally, political uncertainty is remerging in Italy, with Monti’s government seeing ever-thinning support for continued austerity. Continued weakness in Europe is infecting other major economies, such as Brazil and India.
- While the bulls may celebrate today’s better than expected jobs report, behind the scenes, the job market is actually weakening. The unemployment rate fell because less people are in the work force (a decline in the participation rate). In addition, a net revision downwards of 49,000 over the prior two months points to a much weaker job market than many believe. Meanwhile, buried in the ISM’s Non-Manufacturing Index, the employment sub-index is on the precipice of contraction, at 50.3, while in the Manufacturing Index, the sub-index is now contracting for the first time in 3 years. What’s more, Gallup reports that its measure of unemployment has risen significantly, and job creation has stalled. Challenger Gray & Christmas, an important consulting firm, reports that job cuts are coming down the pipe over the coming months.
SPIEGEL: Merkel Wants An EU Political Integration Pact - Business Insider
If further austerity is the price, I’d be weary of continued agreement on the part of periphery countries.
Furthermore, the idea of handing over sovereignty, especially with Germany running the show, may spark fears of underlying motives of domination, which characterized the country during the first and second World Wars.
Like I mentioned in my outlook, I’ll be looking to France for signs of (progress?). They hold the key.
Merkel Enlists Kohl as an Unlikely Ally - NYTimes.com
Ms. Merkel’s public break with Mr. Kohl stunned many Christian Democrats at the time. They were not used to such disloyalty from the party’s secretary general. Her criticism was regarded as an act of betrayal of Mr. Kohl, who had fostered her political career, often referring to her as “the girl.”
Now, as the euro crisis reaches a critical stage, Ms. Merkel is finally trying to make up. She is reaching out to Mr. Kohl because he is still considered to be one of the most committed and passionate pro-Europe figures in Germany.
“We need as much support as possible to campaign for the euro and Europe,” said Ruprecht Polenz, chairman of the German Parliament’s foreign affairs committee. “There is no other option for Germany.”
That does not reflect the mood among Germans or in Ms. Merkel’s center-right coalition.
According to opinion polls, euro-skepticism is increasing. Germans fear they will have to provide more financial guarantees to rescue Greece and other struggling countries that use the common currency. Ever more openly, German politicians are calling for Greece to leave the euro.
Not only that. Leading politicians — particularly Finance Minister Wolfgang Schäuble, a Christian Democrat — are calling for a referendum on Europe.
It is not just because Mr. Schäuble believes Germans should have a say on the direction Europe is taking. He and others are also desperately afraid of what might happen on Sept. 12. — NY Times
German Chancellor Angela Merkel renewed her call for austerity as crucial to tackling financial turmoil in the euro area, praising Canada’s economic example as she returned to the crisis fight after her summer vacation. (via Merkel Cites Canada as Debt-Deficit Model in Europe’s Crisis - Businessweek)
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Austerity will likely continue and could further worsen an already fragile investor climate as austerity-wrecked periphery countries remain in the throes of a debt trap.
Weekly Bull/Bear Recap: Jul. 2-6, 2012
Bull
+ The U.S. economy continues to grow; recent data is only a pause that refreshens.
- The consumer is resilient in the face of slowing economic conditions abroad. The National Restaurant Association reports that performance and expectations for May are near 2006 levels. Meanwhile, auto sales rebound, surprising most analysts.
- U.S. Rail Traffic continues to show an expanding economy and two key sectors of the economy, autos and housing, are poised to lead a re-acceleration of growth.
- Construction spending for May surges the most in 5 months, signaling that activity has finally bottomed and will be a job creator in the quarters to come.
- Speaking of job creation, ADP reports a stronger pace. Meanwhile, jobless claims fall under 380K for the first time since mid-May, planned job cuts plunge to a 13-month low, and the Monster Employment shows growing labor demand. While the BLS job report is below expectations, wage growth firms up and the average workweek ticks higher.
+ Gas prices have plunged over the past 3 months, while ISM Prices-Paid subcomponents are in deep contraction territory. Conditions are ripe for the Fed to initiate another QE and confirm that central banks are coordinating policy, causing a turn in sentiment and a powerful rally.
+ Meanwhile, China has plenty of ammunition for additional stimulus. However, the economy is stabilizing on its own as per China’s non-manufacturing index, which rises to a 3-month high of 56.7. There will be no hardlanding in China. Monetary officials are loosening monetary policy, setting the stage for a strengthening recovery over the 2nd half of the year.
+ German factory orders come in better than expected and is good news for the exporting powerhouse. Global growth has weakened but will stabilize soon.
Bear
- Investors are giving the thumbs down towards solutions presented at the latest European summit . Spanish yields are back within striking distance of 7%, while Italian bonds are above 6%. Core-countries are reneging on providing unconditional help to the periphery. A crisis of confidence is set to fragment the Eurozone. We are at most weeks away from a negative worldwide financial shock, leading to a global recession.
- Merkel is under increasing pressure from officials in her native Germany. The CSU, the Constitutional Court, and now the President of the Bundesbank are making it clear that political will in Germany has been exhausted. A referendum must take place. Meanwhile, the Greek government is set to collapse again soon. The ECB cut interest rates, but it isn’t enough for the QE-addicted market. Finland says the “unthinkable.”
- U.S. economic data continues to point to increasing sluggishness and ultimately a recession. The ISM June’s manufacturing index turns in its first contraction print in 35 months; important leading indicators — New Orders and Backlogs — are in solid negative territory. While ADP shows an improved labor market, the BLS has a different account of its health. Weekly consumer metrics are showing significant weakness and outlooks in the retail sector are getting slashed.
- Global economic data continues to disappoint. Euro-area unemployment climbs to a record 11.1% in May. The bulls were wrong, Germany did not decouple from the rest of Europe, as May’s PMI fell to a 3-year low and weighted on a gloomy Eurozone PMI. Slumping New-Orders for most PMIs signal global recession has arrived. Globally coordinated interest-rate cuts smell of panic.
- “But trust is shattered at the very top of the financial system.”
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Be sure to check out my newly minted macro and market outlooks. Happy Independence day to all of America. I love my country and look forward to better times ahead.
gulfnews : German Chancellor Angela Merkel hardens stance on debt
Monday’s not looking so hot.
European leaders clashed over joint debt sales as they called on Greece to stick with the budget cuts needed to stay in the euro and offered no immediate relief for recession-wracked Spain.
The 18th summit in more than two years of crisis fighting was marked by new French President Francois Hollande’s challenge to the German-dominated deficit-cutting orthodoxy that has failed to stabilize the euro area and led to speculation that Greece might be forced out.
“We had a not unheated discussion on euro bonds,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels early today after six hours of talks. Joint borrowing “didn’t find much support, particularly in the German speaking area but found a certain enthusiasm in the French speaking area.” (via EU Chiefs Clash on Bonds Amid Call Greece Keep Cutting - Bloomberg)
The Associated Press: Germany staunch in opposition to eurobonds
Germany is making clear ahead of a European Union summit that Chancellor Angela Merkel’s government remains staunchly opposed to the idea of jointly issued bonds for the 17-nation eurozone.
At Wednesday’s informal meeting of the EU’s 27 leaders in Brussels, newly elected French President Francois Hollande is expected to push for so-called eurobonds, which can be used to fund investments or boost banks’ capital reserves.
But Germany argues they would lessen the pressure on heavily indebted countries such as Greece or Italy to get their finances in order and likely raise borrowing costs for countries in better shape, such as Germany, Europe’s biggest economy.
A senior German official stressed that despite the pressure from some other European countries, Merkel’s government has not eased its opposition to eurobonds.
“You can wake me up in the middle of the night, at 3 a.m., and then I will tell you what our position is — also at 5 a.m., it doesn’t matter. We think that eurobonds are not the right path for many reasons and in our opinion they cannot be part of a growth strategy,” said the official, who briefed reporters on condition of anonymity in line with government policy. —— Associated Press
Europe needs growth “in the way that Mario Draghi, the president of the European Central Bank, said it today, that is in the form of structural reforms,” the chancellor told a conference of her Christian Democratic bloc in Berlin today. (via Merkel Backs Draghi’s Call for Growth to Combat Debt Crisis - Bloomberg)
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Germany may be having a change of heart. Is it too late? Will pro-growth policies include relaxing fiscal deficit targets?
Just a quick comment. The S&P 500 slumped 20 points to finish off the trading day. The bears might be making their move. The sell off was on heavy volume (bottom chart). The index closed right at the lower boundary of the “wedge/triangle” (top chart).
It’s important for the bulls to respond tomorrow to defend the trend line. If it’s broken then we have minor support at 1,229. I think a clear shot to the 1,220 level would be in the cards though. If 1,220 is broken, then a lower low would be put in. The probability for an end to the bull run we’ve had since early October would significantly increase.
Perhaps tomorrow will bring good jobless claims report. However, like I said in my prior post, we need good news from Europe. The market acting in a negative fashion, despite good economic data (Empire Manufacturing, Retail Sales, Industrial Production, etc.), tells me that it’s not about the U.S. economy anymore; it’s all about Europe.
Either way the market goes, I’d prepare for a big move in the coming days/weeks.
Pick your color Red or Black. I’m siding more with Red if we don’t have good news from Europe, which doesn’t seem to be the case.
Greece on the Brink - NYTimes.com
Well said NYT.
Latest on The Eurozone
German Parliament Slows Euro Rescue Decisions — Spiegel
German Parliament Expected to Hold Full Vote on EFSF — Spiegel
Euro Backstop to be Leveraged to One Trillion Euros — Spiegel
It’s all quite dicey, but I must admit, German caves every time and with Parliament voting on the measures and not a true national referendum, the chances of it passing seem pretty good to me. They’ve passed everything else right?
Euro bail-out in doubt as ‘hysteria’ sweeps Germany | NEW$ TO U(SE)
I would be very hesitant to buy risk assets for the next couple of weeks. The situation in the Eurozone is untenable and I don’t think her countries are unified enough to push into a fiscal union. September could live up to its billing as historically the year’s worse month.
