Expecting EU Leaders to Present Another Fudge

July 21, 2011

Markets had been hopeful earlier this week that EU leaders might find a way to stop the prolonged euro debt crisis.  On this D-day, it seems that investors are braced for disappointment.

  • The German Dax and Paris Cac are down 0.9%, and the British Ftse has lost 0.8%.
  • The euro has lost 0.4% against the dollar and is lower on several of its crosses as well.
  • The sour mood was reinforced by poor purchasing manager surveys from Euroland, Germany, and France.

The dollar is unchanged against sterling and the Canadian and New Zealand dollars.  It has eased 0.1% versus the yuan, but risen 0.3% relative to the Aussie dollar, 0.2% against the Swiss franc and 0.1% vis-a-vis the yen.

The 10-year German bund and Japanese JGB yields firmed by two and one basis points.  British gilts are unchanged.

Oil prices fell by 0.9% to $97.48 per barrel, while gold has edged up 0.2% to $1599.40 per ounce.

In the Pacific Rim, share prices were unchanged in Japan, up 0.4% in Indonesia, New Zealand and Singapore, but down 1.1% in China, 1.3% in Sri Lanka, 0.6% in the Philippines, 0.5% in South Korea, and 0.4% in India.

Preliminary euro area purchasing manager surveys suggest that growth practically stalled at the start of the third quarter.

  • The composite Euroland PMI had a July reading of 50.8, down from 53.3 in June, 55.8 in May and 57.8 in April.  It was the worst score since August 2009.  A reading of 50 connotes the breakeven point between contraction and expansion.  Manufacturing production did dip under that threshold to 49.5 versus 52.5 in June and 60.2 in April.  Overall manufacturing printed at 50.4, while seervices slid to 51.4 from 53.7 in June and 56.7 in April.
  • The German composite PMI sank to a 2-year low of 52.2 from 56.3 in June and 60.4 in March.  Manufacturing and services were at 21-month and 17-month lows of 52.1 and 52.9. 
  • The other pillar of strong euro area growth in 1Q11 was France, where the composite PMI has now dropped to 52.8 from 54.9 in June and 62.4 in April.  Manufacturing (50.1) and services (52.4) constituted 24-month and 16-month lows.  Manufacturing production had a sub-50 score of 49.7 versus 52.4 in June and 61.1 in April.
  • Euroland’s slowdown was experienced in the core economies and the peripherals.  One silver lining is that price strains are easing as a result.
  • These readings, if sustained, would not be consistent with the ECB’s view of continuing moderate recovery.

China’s flash reading for the manufacturing purchasing managers survey plumbed to a 28-month low in July of 48.9, down from 50.1 in June.  It was the first sub-50 score since July 2010.

Japan’s all-industry index, a supply-side monthly measure of GDP, advanced 2.0% in May on top of April’s 1.4% recovery.  Although the May gain was a bit bigger than forecast, the April-May average remained 1.7% lower than the 1Q average level.  The all industry index and real GDP each posted consecutive declines in the final quarter of 2010 and the first quarter of this year. 

Japan’s customs clearance trade surplus was only JPY 71 billion in June, down from JPY 671 billion a year earlier.  Exports slid 1.6% on year, whereas imports advanced by 9.8%.  Reflecting the Sendai earthquake, a trade deficit of JPY 895 billion was posted in the first half of 2011 following a JPY 3.31 billion surplus in the second half of 2010.  Export volumes were 8.3% lower than a year earlier in 2Q11.

The euro area registered a EUR 5.2 billion seasonally adjusted current account deficit in May, similar to April’s EUR 5.4 billion shortfall.  The unadjusted deficit of EUR 58.0 billion in the twelve months to May was 3.1 times greater than a year earlier, but the Basic Balance, which includes long-term capital movements as well as the current account, accrued to EUR 174 billion in the year to May, 11.2% wider than in the year to May 2010.

The volume of British retail sales advanced 0.7% in June but just 0.4% on year.  Sales in the second quarter were 0.2% greater than in 1Q and just 0.9% higher than a year before.  Public-sector borrowing in June of GBP 14.0 billion was similar to GBP 13.6 billion in June 2010 and likewise left the second quarter total of GBP 39.2 billion at about the same level as GBP 39.5 billion in 2Q10.  Outstanding debt equaled 61.9% of GDP last month, up from 55.3% in June 2010.  The Nationwide gauge of British consumer confidence slid to a reading of 51 in June from 55 in May.

Although the Swiss trade surplus narrowed in June, the CHF 11.6 billion first-half surplus was 18.4% greater than a year earlier.  Swiss M3 grew 5.2% in the year to June, down from a 12-month rise of 6.1% in May.  Investor expectations regarding the Swiss economy weakened to minus 58.8 in July according to the ZEW index from minus 24.3 in June.

South African wholesale turnover grew 6.9% in the year to May, accelerating from a 12-month rise of 4.8% posted in April.

Hong Kong CPI inflation rose 0.4 percentage points to 5.6% in June.

EU leaders are said to be trying to fashion a guarantee of Greek debt by the union.

Central bank policy decisions are awaited from Turkey and South Africa today.  Neither one is expected to raise key interest rates, as Brazilian monetary officials did late yesterday.

Scheduled U.S. data include the Philly Fed index, the FHFA house price index, the index of leading economic indicators, and weekly jobless insurance claims.  Fed Chairman Bernanke and Chicago Fed President Charles Evans speaks publicly today.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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