Evidence of Stronger-Than-Assumed European Growth as Investors Await Bank Stress Test Results

July 23, 2010

Germany and Britain reported data with huge upside surprises.  Stress tests performed on 91 European banks will begin to get reported today at 16:00 GMT (noon on the U.S. East Coast.  Some Spanish banks are expected to fail.  Investors are already complaining that the test assumptions were not sufficiently rigorous.  Moody’s placed Hungary’s credit rating under review.  Hungarian officials have balked at accepting IMF-mandated deficit cuts.

The IFO index of German Business recorded its largest monthly advance since at least 1990, leaping to 106.2 in July from 101.8 in June.  Analysts had anticipated a dip to 101.5.  106.2 was the best reading since July 2007 and 24 points above the low in March 2009.  The current situation component went up 5.6 points to 106.8, while business expectations climbed 3.0 points to 105.5.  Manufacturing improved 7.8 point to 18.4, a 47.9-point favorable swing from 12 months earlier, to pace the improvement, but construction, wholesaling, and retailing also rallied with on-month gains of 3.2 points, 12.0 points, and 13.6 points.

The IFO Institute also released its monthly German services index, which improved 2.5 points to 18.0 in July after readings of 15.0 in each month of the second quarter.  The current situation component went up six points, while expectations dipped one point.

British GDP grew 4.6% at an annualized rate in the second quarter, twice as much as assumed.  The non-annualized 1.1% advance followed gains of 0.4% in the final quarter of 2009 and 0.3% in 1Q10.  Factory production shot up 1.6% last quarter, most since 1999, while business services and finance went up 1.3%.  Construction’s jump of 6.6% (not annualized) was the sharpest quarterly improvement since 1963. The U.K. quarterly services index rose 1.0% in May and 0.8% in March-May from December-February.  Real GDP posted an on-year increase of 1.6%, and the services index was 2.1% higher in May than a year earlier.

The dollar slumped 1.1% against sterling.  The GDP data support Bank of England hawk Andrew Sentance, who worries about inflation and dissented in favor of rate increases at the central bank’s June and July policy meetings.

The dollar also lost 0.5% overnight against the euro and slid by 0.2% against the Australian and New Zealand dollars.  The greenback is unchanged against the Swiss franc and Chinese yuan and 0.1% firmer versus the Canadian dollar.

The yen fell 0.5% against the dollar as another high Japanese official called recent yen strength excessive, further fanning speculation that intervention or other actions might be taken to remedy the problem.

Ten-year British gilt and German bund yields climbed seven and four basis points.  The ten-year Japanese government bond yield firmed two basis points but remains below 1.1% at 1.08%.

The release of Australian import and export prices revealed a sharply improved terms of trade, which augers well for future income and consumer spending growth in this key commodity exporter.  In the second quarter, export prices shot up 16.1% and 7.1% from a year earlier, while import prices rose 1.9% but remained 5.2% lower than a year earlier.

Not all European data surprised pleasantly.  French consumer spending on manufactured goods recorded a disappointing 1.4% drop in June and was 1.9% lower than a year before.  Spending fell 0.9% in the second quarter on top of a 1.9% drop in the first quarter.

Italian consumer confidence of 105.6 in July was better than expected.  But retail sales eased 0.3% in May and 1.9% from a year earlier.  Spanish producer prices edged 0.1% higher in June and were 3.2% above year-earlier levels.

Oil prices dipped 0.3% from an 11-week high even though Tropical Storm Bonnie intensified as it heads into the Gulf of Mexico.  Gold edged 0.1% higher to $1197.20 per troy ounce.

Polish retail sales outperformed expectations in June, advancing 4.1% and 6.4% from a year earlier.

Industrial production in Taiwan was 24.3% higher than a year earlier in June.  That’s a bit better than forecast.

Canadian consumer price inflation slowed to 1.0% in June from 1.4% in May, mainly because of a drop in the energy component to 1.3% from 6.2%.  Non-energy consumer prices and the core CPI index each slid a tenth to 0.9% and 1.7%, respectively.  Canadian monetary officials do not anticipate any significant deviation of inflation from their target through 2012.

No meaningful U.S. economic data are scheduled for release today.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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