A Different Spin on the ECB Turns Markets Around Ahead of U.S. Jobs Data

August 3, 2012

European stocks have rallied and the dollar is weaker.  These developments are somewhat surprising considering the release of more sobering purchasing managers data and in light of no immediate and unconditional action from the Fed or ECB.  Upbeat press reports created this turnaround.

Share prices have recovered 3.1% in Spain, 2.2% in France, 1.9% in Germany, and 1.3% in Britain.  Earlier in the Pacific Rim, equities dropped by 1.1% in Australia, Japan and South Korea but firmed 0.8% in China.

The dollar fell on balance overnight by 0.9% against the euro and Swissie, 0.6% versus the Australian dollar, 0.5% relative to the loonie and sterling, and 0.4% against the kiwi.  The dollar is 0.1% firmer against the yen and yuan.

Gold and oil prices rose 0.5% to $1598.40 per ounce and $88.18 per barrel.

The 10-year German bund yield leaped ten basis points to 1.33%.  10-year British gilts are up six bps, but the 10-year Japanese JGB relapsed 4 bps.  The yield on the 2-year JGB (0.09%) fell to a 7-year low.  Spanish 10-year bond yields spiked as high as 7.20% but have settled back 15 bps.

Press reviews of the FOMC statement on Wednesday stressed the promise to “provide additional accommodation as needed to promote a stronger economic recovery” rather than the fact that no fresh action was taken immediately.  The thinking is that more quantitative easing will be undertaken in September, but that’s smack in the middle of the presidential election campaign.  Note that when the Fed met September 16, 2008 just days after Lehman failed, the then-2.0% federal funds target was not cut.

Likewise, the business press today is full of speculation that a grand bargain between Euroland politicians and the ECB is under way that will indeed pave the way for ECB buying of Spanish and Italian debt.

A bill in the U.S. House of Representatives to provide drought relief will not be considered by the Senate until after the summer recess. 

Retail sales volume in the euro area edged up 0.1% in June after climbing 0.8% in May, but such was 1.2% lower than a year earlier.  Sales volume fell 2.6% at an annualized rate in the second quarter as a whole.

Lots of purchasing managers data for service sector activity and whole economies for the month of July were released.

  • Euroland’s services PMI printed at a 4-month high of 47.9, 0.3 points higher than the preliminary indication and 0.8 points better than in June.
  • The composite Ezone PMI (manufacturing and services) only edged up 0.1 to 46.5, however, suggesting that the third quarter began with GDP contracting at about a 0.6% pace. 
  • Germany’s composite score of 47.5 was at a 37-month low.  The services reading of 50.3 conveys stagnation and included the weakest orders component since mid-2009.
  • The French composite PMI of 47.9 was at a 4-month high.  So was the services score of 50.0.
  • Italy’s composite PMI of 43.2 constitutes a 3-month low.  A services score of 43.0 was down from 43.1 in June and the 14th sub-50 reading (meaning that activity is shrinking) in a row.
  • Spain’s composite PMI of 43.1 represents a deep recession but at least was at a 4-month high.  Business confidence in the private services sector is at its weakest point in over three years.  The overall services PMI of 43.7 was below 50 for a 13th consecutive month.
  • Ireland’s composite PMI slipped to a 2-month low of 50.8, and the services PMI was below 50 at 49.1.
  • The British service-sector purchasing managers index slid to 51.0, lowest of 2012.  Weather and Olympic preparations were blamed partly but not entirely for the near stagnation.
  • The Russian services PMI slipped to 52.0, a 22-month low, and the composite Russian index remained at 52.6, suggesting growth of little more than 2.5%.
  • Japan’s composite PMI score was 47.4, weakest this year.  The services PMI dropped 1.8 points to 47.5 and was 6.2 points lower than in March.  Business confidence in services had its second worst reading in 37 months.
  • According to the HSBC indices, China’s composite PMI improved to 51.9 from 50.6 in June, and the services index rose 0.8 points to 53.1.  These results suggest a flattening slowdown but do not herald a dynamic rebound.
  • The main take-away from India’s PMI result is the persistence of higher-than-desired inflation.  The composite index fell to 54.4 from 55.7 in June, while the services PMI edged just 0.1 lower to 54.2.
  • Hong Kong’s services PMI rose 0.5 points to 50.3.
  • Australia’s service-sector PSI sank to a disappointing 46.5 from 49.8 in June and a second-quarter average score of 47.6.  Sales, orders, and jobs each had sub-50 readings.

Thai consumer confidence slipped 0.3 points to a reading of 68.2 in July.

Czech retail sales rose 0.4% on month in June but was 2.4% lower in the second quarter than a year earlier.

Turkish CPI inflation ticked higher to 9.1% in July from 8.9% in June and was associated with a core inflation rate of 7.5%. PPI inflation eased to 6.1% from 6.4% in June.

New Zealand’s AA rating was retained by S&P.  The outlook is considered stable.

U.S. jobs data are due at 08:30 local time (12:30 GMT), and the ISM will release service sector purchasing managers survey results at 14:00 GMT.

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


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