No Breakthrough at EU Summit on Greece

May 24, 2012

EU leaders in Brussels produced no fresh ideas on Greece.  Germany still is resisting euro bonds, yet uncertainty over the status of Greece and the risk of contagion is hurting Germany’s economy more discernibly.

Stocks are higher in Europe, nonetheless.  The British Ftse, Paris Cac, and German Dax have so far rebounded by 1.2%, 1.0% and 0.6%.

In the Pacific Rim, share prices fell 2.3% in Vietnam but climbed 1.7% in India.  Stocks dropped 0.8% in China, 0.6% in Hong Kong, 0.4% in New Zealand, 0.5% in The Philippines, and 0.3% in Australia and Taiwan.  The Japanese Nikkei firmed 0.1% but remains weak at 8,563, 78% below its end-1989 historical peak.

The dollar is narrowly mixed overnight, with declines of 0.4% relative to the kiwi, 0.3% against the Aussie dollar, 0.2% versus the yuan and 0.1% against the yen but gains of 0.2% versus sterling and 0.1% against the euro and Swiss franc.  The loonie is unchanged against its U.S. counterpart.

Gold and oil prices rose by 1.1% each to $1565.90 per ounce and $90.85 per barrel.

German bunds and Japanese JGBs are steady.  The 10-year British gilt yield is one basis point firmer.

The IFO Institute’s German business climate index for industry slumped 3.0 points to a six-month low of 106.9 in May.  Analysts had projected a 109.4 reading.  Current conditions fell by 4.2 points, and expectations saw a 1.8-point drop.  By industrial sector, retail took a particular hit, swinging to minus 3.0 from +10.7 in April.  Manufacturing, construction and wholesaling also deteriorated.  The companion IFO index for services, by contrast, improved 2.4 points to a reading of 24.8, and hiring prospects remain decent.

Germany’s preliminary purchasing managers survey was reported.  The overall composite index swung below the 50 no-change line to 49.6 from 50.5 in April.  Manufacturing (45.0) showed the steepest rate of contraction since mid-2009.  There was resilience in services, however, which had an unchanged reading of 52.2.

The French composite PMI sank to a 37-month low of 44.7 in May from 45.9 in April.  Manufacturing (44.4) plumbed to a 36-month low, with factory production dropping 3.9 points to a 43.6 score.  Services were unchanged at 45.2 but a tad below expectations. 

The French statistical agency, INSEE, also reported a slide in business sentiment, which saw a reading of 93 after 95 in April.  Analysts had anticipated a slower rate of deterioration.

Euroland’s flash purchasing managers index dropped by 0.8 points to a 35-month low in May of 45.9.  The separate readings for manufacturing and services were at 45.0 and 46.5 in May.  The data suggest that GDP in the current second quarter of 2012 will contract by at least 0.5% (2.0% annualized or more). 

Both Germany and Britain released second estimates of GDP growth last quarter.

  • British GDP showed a deeper 0.3% on-quarter contraction and was also 0.1% lower than a year earlier.  Net exports exerted a 0.5 percentage point negative drag on the growth rate.  Consumption rose just 0.1% on quarter and was marginally smaller than a year earlier.  Both production (down 0.4%) and construction (off 4.8%) fell last quarter, and service-producing GDP only firmed 0.1%.
  • German GDP advanced 0.5% on quarter but only 1.2% on year after adjusting for the leap day effect and other calendar year variations.  GDP in Euroland’s main economy was only 1.3% greater than in the first quarter of 2008, an annualized rise of 0.3% over four years.  Germany remains an export predator; net exports accounted for 0.9 percentage points of non-annualized GDP growth between 4Q11 and 1Q12.

According to the British Bankers Association, mortgage loans in April totaled 32,440, 1.6% more than in March.  Britain’s monthly measure of service-sector activity firmed 0.1% in 1Q and by 0.8% from a year earlier.  But the index in March was 0.5% lower than in February.

The HSBC purchasing managers index for China posted a seventh straight sub-50 reading in May.  Such revealed a greater rate of contraction with a reading of 48.7 after 49.3 in April, and this report seemingly clears the way for more aggressive monetary policy loosening.  Evidence of inflation continues to ebb in China, while export orders (47.8) fell at an increasing rate according to the report.

Japanese stock and bond transactions in the week of May 19 generated a JPY 404 billion capital outflow following a JPY 1.615 trillion outflow during the previous week.  The Bank of Japan released its monthly assessment, finding increasing signs of a shift from stagnation to a pick-up of activity.

Vietnamese CPI inflation of 8.3% in the year to May was less than assumed.  Hong Kong’s trade deficit of HKD 42.9 billion in April did not narrow quite as much as forecast. 

Dutch unemployment climbed 0.3 percentage points to 6.2% in April.  The Swiss trade surplus in April of CHF 1.33 billion was 30% smaller than predicted and down 16% below the prior month’s surplus.  Import volumes increased 2.6% on the month. Finnish producer price inflation stayed at 1.4% in April.  Retail sales in Hungary were 0.9% greater than a year before in March.  The Czech Republic reported weaker business sentiment and consumer confidence in May.  Icelandic CPI inflation decelerated to 5.4% in May from 6.4% in April.

German Chancellor Merkel and Finance Minister Schaeuble will be speaking publicly today.  So will ECB President Draghi, New York and Minneapolis Fed Presidents Dudley and Kocherlakota, and David Miles of the Bank of England. 

The South African Reserve Bank has a scheduled interest rate announcement later today.

Scheduled U.S. data releases include durable goods orders, the K.C. Fed manufacturing index, and weekly jobless insurance claims.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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