Euro Sovereign Debt Concerns Continue to Weigh on Market Sentiment

February 23, 2012

The Greek bailout will only be as good as the assumptions about economic growth that underlie it, and those took a new hit today.  The EU revised projected GDP growth in 2012 downward to minus 0.3% from a forecast of 0.5% made in November.  For individual countries using the euro, the EU projects GDP contractions of 4.4% in Greece, 3.3% in Portugal, 1.3% in Italy and 1.0% in Spain.  GDP is projected to rise only 0.6% in Germany, 0.5% in Ireland, and 0.4% in France.  Meanwhile, projected CPI inflation was bumped higher to an above-target 2.1% because of elevated oil prices.  If the inflation forecast proves correct, the ECB’s latitude to ease will be less than hoped.

The dollar has declined overnight by 0.5% against the Australian dollar, 0.4% versus the kiwi, euro and Swiss franc, 0.3% relative to sterling and 0.2% against the loonie and yen.  The dollar firmed 0.1% against the yuan, however.

Little change has occurred in European share prices.  The German Dax is off 0.3%, while the British Ftse has firmed 0.2%.  The Paris Cac is steady.  In the Pacific Rim, the Japanese Nikkei rose 0.4%, and China posted a 0.3% advance.  Most other markets lost ground including those in South Korea (off 1.0%), Singapore and Indonesia (down 0.9% each), The Philippines and Hong Kong (minus 0.8%), and New Zealand and Australia (off 0.2%).

Ten-year German bund and British gilt yields firmed two basis points.  The 10-year JGB remained steady.

Oil and gold prices edged up 0.2% and 0.4% to $106.50 per barrel and $1778.00 per ounce.

The IFO February survey of Germany’s business climate beat forecasts with a 7-month high of 109.6.  This was the fourth straight monthly improvement from an October low reading of 106.5.  The index stood at 115.1 a year ago, however.  Current conditions rose 1.2 points to 117.5, best since September, while expectations increased 1.4 points to 102.3, best since July.  The construction sector had its best reading in over a year, and the wholesale sector index rose by 4.4 points.  Retail went up 4.1 points, but manufacturing only climbed 0.9 points further.  IFO Institute officials noted the strength of domestic demand has so far prevented recession but warned of continuing risk if the regional debt crisis sours.  The IFO services business climate also rose to a 7-month peak.

Italian consumer confidence improved 2.4 points to 94.2 in February, a higher-than-forecast reading.  Swedish consumer sentiment, in contrast, weakened to minus 3.2 from minus 1.3 in January.  Swedish factory-sector confidence (minus 13) improved just one point instead of the predicted two point move.

Germany’s index of leading economic indicators showed a larger rise in February (0.3%) than it had in January, but the coincident index (down0.2%) continued to sputter.

The Confederation of British Industries released the February monthly survey of industrial trends.  There was a much larger-than-assumed improvement from readings of minus 23% in December and minus 16% in January to minus 3% in the current month.  This was the best score since August.  According to figures from the British Bankers Association, the number mortgage loans in January (38,092) was 4.2% greater than in January and beat forecasts. 

Polish unemployment rose to 13.2% in January from 12.5% in December.  Romanian M3 money growth accelerated to a 12-month 8.8% in January.  Irish CPI inflation slowed to 2.2% last month from 2.5% in December.  PPI inflation picked up to 2.7% from 2.4%.

Japanese stock and bond transactions generated a JPY 603 billion inflow last week versus a JPY 782 billion outflow in the prior week.  CPI inflation in Singapore settled back to 4.8% in January, with a core rate of 3.5%, from 5.0% in December.  South African PPI inflation of 8.9% after 9.8% in December fell more sharply than predicted last month.

In the United States, investors await weekly jobless insurance claims, the FHFA home price index, and the Kansas City Fed manufacturing index.  Republican presidential candidates held their first debate in four weeks last night.  The Michigan and Arizona primaries in the coming week followed by Super Tuesday on March 6 are awaited for clarification.  Analysts are starting to speculate about the possibility of a brokered Republican Convention in the summer.

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

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