Newfound Hope from the Brussels EU Summit

June 29, 2012

Markets responded positively to verbal progress on a number of fronts such as an EU growth pact of EUR 120 billion, ECB involvement in EU bank supervision, and better terms for recapitalizing Spanish banks.  We’ve seen this before, that is a pretense of greater cohesion at a big meeting, followed by a market rally, followed by a more sober assessment of political and economic reality followed by new disappointment.  But for now, traders are focused on what’s being said in Brussels rather than the plethora of midyear and end-quarter data releases overnight.

A focus in the United States continues to be the fiscal and political fallout of yesterday’s 5-4 Supreme Court decision affirming Obama’s health care legislation. 

German parliament will be voting later today on the fiscal pact and ESM.

In Europe, equities have shot up 3.0% in Spain, 2.4% in Germany, 2.7% in France and 1.3% in Britain.  Earlier in the Pacific Rim, share prices rose by 1.5% in China and Japan, lifting the Nikkei to a close above 9,000 for the first time since May 10, 2.2% in Hong Kong, 2.6% in India, 1.9% in South Korea, 1.8% in Taiwan and Indonesia, 1.2% in Australia, and 1.1% in Singapore.

Ten-year German bund and British gilt yields have risen by twelve and eleven basis points overnight.  The Japanese JGB firmed three basis points.

Commodities have advanced strongly as well, with oil jumping 3.2% to $80.15 per barrel and gold up 1.4% at $1572.50 per ounce.

In currency trading, prior trends have partly reversed.  The dollar has lost 1.5%, 1.4%, and 1.0% against the commodity-sensitive currencies of Australia, New Zealand and Canada.  The dollar also lost 1.1% relative to the Swiss franc and euro and 0.6% versus the yen and sterling.  The yuan edged up 0.1%.

Several Japanese statistics were released.  The 49.9 June reading on the manufacturing purchasing managers index was down from 50.7 in April and May and below 50 for the first month since November.  Japan’s jobless rate fell 0.2 percentage points to 4.4% in May, a low so far in 2012, but employment was 0.5% smaller than a year earlier.  CPI inflation in May was less than forecast.  The index fell 0.3% on month and posted only a 0.2% on-year increase.  The core index fell both on month and on year.  Tokyo consumer prices dropped 0.4% in June and by 0.6% from a year before.  Construction orders were 0.9% lower in May than a year earlier, and housing starts posted a 4.2% increase, which was less than half as much as in the year to April.  Industrial production was the biggest disappointment of the night, falling three times faster than expected by 3.1% in May.  Nonetheless, METI officials upgraded their assessment of industrial output and projected such will rise by 2.7% in June and 2.4% further in July.  Real Japanese household spending increased 1.5% on month and 4.0% between May 2011 and May 2012.

French GDP stagnated in the first quarter after upticks of 0.3% in 3Q11 and 0.1% in the final quarter of last year.  Consumption and exports only firmed 0.2%, while gross fixed capital formation (business investment) fell by 0.7% in the opening quarter of 2012.  Net exports exerted a 0.2 percentage point drag on GDP growth.  GDP was only 0.3% higher than in the first quarter of 2011.  In a separate French release, PPI inflation slowed to 1.7% last month from 2.2% in April.

German retail sales laid an egg in May.  In on-year terms, sales volume fell 1.1% versus forecasts of a nearly 2% rise.  In April such had been 4.3% less than a year before.  In month-on-month terms, sales fell by 0.3% on top of a 0.2% decline in April.  Sales in January-May were 0.3% higher than a year earlier.

Euroland CPI inflation remained steady at 2.4% in June, 0.5 percentage points above the ECB target ceiling.  Such averaged 2.6% in the first half of 2012, down from on-year increases of 3.0% at the recent peak last September-through-November.

Money growth accelerated in the euro area last month.  M3 was 2.9% higher in May than a year earlier and up by 2.8% in March-May.  Faster M1 growth of 3.3% after 1.8% accounted for the increased pace of M3.  Growth in private credit (1.5%) and private loans (negative 0.1%) remained very anemic last month.  These figures will not impact ECB monetary policy.

Greek PPI inflation edged down from 5.1% in April to a 19-month low of 5.0% in May.  Greek retail sales plunged 13.2% in the year to April.  In other eurozone peripheral economies, Portuguese industrial production and retail sales in May were respectively 6.7% and 5.0% lower than a year earlier. Spain posted another current account deficit in April, but its EUR 1.7 billion size was 44.5% smaller than the March shortfall.

The British index of service-sector activity was unchanged in February-April from its level in November-January.  British consumer confidence remained unchanged in June with a reading of minus 29.  That was level in February and March as well but two points better than the score in April.

Switzerland recorded a CHF 19.5 billion current account surplus last quarter, down from CHF 26.5 billion in 4Q11.  The Swiss index of leading economic indicators improved more than anticipated in June, rising to a reading of 1.16 according to the KOF Institute from a score of 0.80 in May.

Dutch PPI inflation eased to 2.1% in May from 2.5% in April.  Norwegian retail sales advanced in May by 1.7% on month and 4.1% on year.  Czech M2 money growth slowed to 6.1% from 6.5% in April.  Icelandic producer prices fell by 2.5% in May and to a 12-month 1.0% rate of increase. Hungarian PPI inflation increased to 7.8% in May from 7.1% in April and 6.4% in March.  Danish GDP climbed 0.4% on quarter and 0.3% on year in 1Q12.  Domestic demand rose 1.5% but were countered by the drag of weakening net exports. Swedish M2 money growth slowed to 7.3% in May from 8.1% in April.

Australian industrial production rose 0.8% in the first quarter, down from a 1.2% gain in the final quarter of 2011, and was 4.7% higher than in 1Q11.  Factory output, however, sank 0.8% on quarter and increased just 0.6% on year.  Private sector credit in Australia advanced 0.5% on month in May and picked up in on-year terms to 4.0% from a 3.8% in the year to April and 2.3% in the year to March.  M3 money growth in New Zealand accelerated to a 12-month 6.3% rate of rise last month from 5.5% in April. Building permits in New Zealand were 20% greater than a year earlier, their largest advance in four years.

Filipino producer prices fell 3.2% in May and recorded a 12-month increase of just 0.7%, down from 1.2% in the year to April.  South Korean retail sales rose 0.7% in May and by 2.2% from a year earlier.  Staying with South Korea, industrial production advanced by 0.4% on month and 1.6% on year in May, with gains in factory output of 1.1% versus April and 2.6% versus May 2011.  Thailand’s trade balance swung to a $574 million surplus in May from a $734 million deficit the month before.  Thai business sentiment improved by 7.1 points to a 53.8 reading in May, reflecting a continuing bounce-back from last autumn’s devastating flood.

Colombia’s central bank holds a policy meeting today.  South African M3 and private sector credit posted on-year increases in May of 6.5% and 8.3%.  Each gain exceeded street forecasts.  Turkey’s trade deficit widened to $8.6 billion in May from $6.6 billion in April and $7.4 billion in March.

Scheduled U.S. data today are personal spending and income, the Chicago and Milwaukee PMI reports, and the U. Michigan/Reuters gauge of consumer confidence.  Dudley and Bullard, Fed Presidents of New York and St. Louis, speak publicly.  Canada releases monthly GDP and producer price figures.

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

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