New Developments Abroad: G7 Heading For Recession?

July 24, 2008

The dollar advanced 1.1% against the kiwi and 0.6% against sterling but otherwise shows little overnight change.

Stocks in Asia widely mixed: Japanese  Nikkei up 2.2%, China +3.3%, Philippines +3.0%, Vietnam -2.2%, India -1.1%, and Hong Kong -0.2%.  Australia +0.8%.

Stocks lower in Europe: German Dax -1.0%.  Paris Cac -0.6%.  U.K. Ftse -0.5%.

Ten-year sovereign bond yields down appreciably.  JGB off 3.5 basis points to 1.63%.  European yields off even more sharply.

Oil recovered 0.5% to $125.07/bbl, while gold prices are 0.6% higher at $928.30/ounce.

The Reserve Bank of New Zealand implemented its first rate reduction since May 2003, cutting by 25 basis points to 8.0%.  This move was considered possible but less probable than a cut on September 11th.  The RBNZ implied continuing rate cuts then and at following scheduled meetings.

Japan’s customs trade surplus dived 89% y/y to Y 139 bln, as exports (-1.7%) fell for the first time in 55 months.  The most hawkish policymaker at the Bank of Japan, Mizuno, said he is now more worried about growth risks than inflation.  He also predicted a U.S. recovery will not occur until 2010, and said Japan’s government may declare its economy is in recession.

Business sentiment indices for July were much weaker than expected in Germany, France and Italy, raising the possibility of recessions in all three.  The German IFO index slumped from 101.2 in June to 97.5, lowest since September 2005.  The expectations component fell to a recessionary score of 90.0.  The retail, wholesale, and construction sectors are each trending downward, and manufacturing has slowed considerably.  The IFO climate index for services dropped to 9.9 in July from 16.3 in June.   Italy’s business sentiment index fell from 86.7 in June to 83.5, lowest since October 2001.  French business sentiment declined to 98 in July from 101 in June and 108 in March.  The street was forecasting Italian and French business sentiment readings of 86.3 and 100.

Flash PMI scores for Euroland, Germany and France were mostly weaker than expected.  Euroland’s composite reading was at 47.8, connoting contraction since it’s below 50.  That’s a drop from 49.3 in June and its lowest since November 2001.  The manufacturing PMI for the euro area was at 47.5 against a forecast of 48.7 and a June level of 49.2.  The service PMI was at 48.3, lowest since June 2003 and down from 49.1.  The German PMI readings were 52.2 on the composite after 53.0, 50.9 on the manufacturing after 52.6 and 53.3 for services, up from 52.1 in June but down from 58.5 in July 2007.  The French composite score was 47.0 after 49.7 in June, 47.3 in manufacturing after 49.2, and 47.0 in services, down from 50.1.

Spanish unemployment of 10.4% in 2Q08 was a three-year high.  Spain also appears to have entered recession, led by a construction slump.

The volume of British retail sales suffered their greatest month-over-month decline in June (-3.9%) in at least 22 years and rose just 2.2% y/y, least in 29 months.  Retail sales rose 4.4% y/y in 2Q and were 0.6% above the 1Q level.

Consumer prices in Vietnam soared 27.0% in the year to July, up from a 20.3% on-year advance in 1H08.  Hong Kong exports fell 0.6% y/y in June.

Consumer confidence sagged to -9.7 in Denmark during July from -6.6 in June.  Swedish producer prices firmed 0.5% m/m and 3.0% y/y in June.

Euroland’s current account on a seasonally adjusted basis swung to a deficit in May of EUR 7.3 bln from a surplus of EUR 1.5 bln in April.  The unadjusted deficit in May jumped to EUR 21.4 billion.  The chief economist of the German IFO institute advised the ECB not to raise rates further to contain inflation.  Weak growth will do the job.

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