Euroland Accord Gets Mixed Reviews

December 9, 2011

EU leaders announced their fifth effort to stop the sovereign debt chain reaction.  It features automatic mechanisms to rein in structural deficits that surpass 0.5% of GDP and to penalize total deficits in excess of 3.0% of GDP.  The EFSF rescue fund would be activated next year rather than not before 2013 and is to be EUR 200 billion larger than envisaged before.  The issue of penalties on the creditors of the peripherals is murky.  Enforcement of the plan could be another weak spot, as the EU treaty is not being rewritten as some wanted.  ECB President Draghi applauded this plan to tighten fiscal unity.  Bofinger, a key German advisor, gave it a thumbs down.  Investors now await the reaction of the credit rating agencies (Moody’s downgraded three French banks) and of the ECB.  The central reportedly was buying peripheral bonds today. 

Bond yields are higher in the EU peripherals like Spain and Italy but also in Germany (5 basis points) and Britain (3 bps).  The 10-year JGB has dipped 2 bps.

The dollar is mostly softer, with losses of 0.6% against the Swissie and sterling, 0.5% relative to the euro, 0.3% against the loonie, and 0.1% versus the yen and Aussie dollar.  The kiwi and yuan are steady.

Stock performances are mixed, with heavy losses in the Pacific Rim but decent gains in Europe.  Equities fell by 2.7% in Hong Kong, 2.0% in South Korea, 1.8% in Australia, 1.7% in India, 1.5% in Japan, and 1.3% in Singapore and Taiwan.  The German Dax and Paris Cac are 1.3% stronger, while the British Ftse gained 0.5%.

Oil and gold prices advanced by 0.5% and 0.6% to $98.85 per barrel and $1723.50 per ounce.

Japanese third-quarter GDP growth was revised to 5.6% at a seasonally adjusted annual basis from 6.0%.  That small revision masks big changes in components of demand.  The growth contributions of non-residential investment and personal consumption were revised down 0.8 and 0.5 percentage points (ppts).  That of net exports and inventories turned out to be 0.5 and 0.3 ppts greater than estimated initially.  GDP was 0.7% lower than in 3Q10.  The on-year declines of the GDP and personal consumption price deflators, respectively 2.2% and 1.1%, were greater than measured in the preliminary report.

According to the Japanese Ministry of Finance quarterly survey, business sentiment among all large firms swung from a reading of 6.6 in 3Q to minus 2.5 in the fourth quarter, but a revival is anticipated in 1H12.  Sentiment among large manufacturers deteriorated by 16.4 points to minus 6.1.  The Japanese M2 and M3 money aggregates in November were 3.0% and 2.5% higher than a year earlier. A report yesterday put bank lending up 0.2% on year.

Monthly Chinese data for November reflected a greater-than-assumed deceleration of inflation but softer production and demand — all consistent with a soft landing and further monetary easing ahead.

  • Consumer prices were 4.2% higher than a year earlier, the smallest 12-month rate of increase reported so far in 2011 and down from 5.5% in October and 6.5% in July.  Food prices were up 8.8% versus 13.4% in the year to September.  Other consumer prices were just 2.2% greater than in November 2010.
  • PPI inflation slowed to 2.7% from 5.0% in October and a 2011 peak of 7.5% in July.
  • Industrial production posted on-year growth of 12.4% after 13.2% in October, 13.8% in September, and 15.1% in June.
  • Fixed asset investment, up 24.5% on year in January-November, was down from a gain of 24.9% in January-October and January-September.
  • Retail sales increased 17.3% on year versus 17.2% in October and 17.7% in September.

German merchandise exports fell 3.6% on month in October, about three times greater than forecast.  That caused the seasonally adjusted trade surplus to narrow to EUR 12.6 billion from EUR 15.1 billion in September and a 3Q average of EUR 13.3 billion per month.  The EUR 10.3 billion unadjusted current account surplus was some EUR 4 billion less than forecast and down from EUR 14.2 billion in October 2010.

German revised November consumer prices confirmed the preliminary indicators:  unchanged on month and up 2.4% from a year earlier.  Energy prices were 11.1% higher than in November 2010, while all other consumer prices went up just 1.4%.  German labor costs fell by 0.9% last quarter and decelerated in on-year terms to 2.9% from 4.0% in 2Q.

British producer output prices firmed 0.2% last month and decelerated to a 12-month increase of 5.4% from 5.7% in October and 6.3% in September.  Producer input price inflation slowed to 13.4% from 14.3% in October and 18.0% in September.  The core rates of PPI-O and PPI-I of 3.2% and 10.0% were each below the headline all-items figures.

The U.K. goods and services trade deficit narrowed to GBP 1.55 billion in October from GBP 4.30 billion in September.  A smaller merchandise trade deficit of GBP 7.56 billion versus a 3Q average of EUR 9.19 billion in 3Q accounted for the shrinkage.  Britain’s index of leading economic indicators posted a second straight drop of 0.4% in October, and the coincident index merely edged 0.1% higher.

Several countries reported October industrial production.  In France, such was flat on month and up 2.3% on year, less than forecast.  Finnish industrial output was 5.7% lower than a year earlier.  The 12-month rise in Dutch output slowed to 1.1% from 2.6% in September. Irish output rebounded from September’s 2.9% monthly drop to rise 7.3%.  Swedish output advanced by 0.4% on month and 4.7% on year.

Portuguese GDP sank 0.6% last quarter and by 1.7% from 3Q10 according to revised data.  Greek GDP posted an on-year drop of 5.0% in 3Q instead of 5.2% as reported initially.  Norway posted on-year CPI and PPI inflation rates in November of 1.2% and 12.9%. Czech consumer price inflation ticked up to 2.5% from 2.3% in October.  On-year GDP growth in the Czech Republic slowed a full percentage point to 1.2% in 3Q.  Hungarian GDP growth of 1.4% between 3Q10 and 3Q11 confirmed earlier indications.

Consumer confidence in New Zealand weakened this month to a score of 108.4 from 109 in November.  South Korean producer price inflation slowed to 5.1% in November from 5.6% the month before. 

The message of this myriad of data is that the global economy is slowing, and fiscal restraint will augment these headwinds.

Canada and the United States report trade data at 13:30 GMT today.  Canada also releases labor productivity, while the U. Michigan preliminary December measure of consumer confidence arrives today as well. Mexican trades will be reported, too.

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

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