S&P downgrades will haunt e-Zone and divide it

S&P depreciates much of old Europe: too much or not enough?

The ‘what’ of it all

Standard & Poor's Ratings Services stripped triple-A ratings from France and Austria and downgraded seven others, including Spain, Italy, Portugal, Malta, Slovakia, Cyprus and Slovenia. It retained the triple-A rating on Europe's No. 1 economy, Germany. France and Austria were downgraded by one notch from AAA to AA+; Malta, Slovakia and Slovenia were also downgraded by one notch. S&P lowered the ratings of Italy, Spain, Portugal and Cyprus by two notches. When you have to move your belt over more than one notch at a time it’s a big deal, so too with ratings.

Downgraded for ‘inadequate action’

In December S&P had placed 15 of the 17 euro-zone countries on watch for possible downgrades It said Friday it had decided to lower the debt ratings of nine of them because it felt the currency bloc has so far failed to take adequate action. But does that make sense? In what context are the ratings made? The current Zone? The prospective Zone? Until you know the context ratings are not really possible but S&P has plowed ahead.

Rating upheld for ‘inadequate action?’

I guess Germany retained its ‘AAA’ for the same reason: the Zone has done so little.  Had it done more, it certainly would have taken more of Germany’s resources. So in some sense the S&P is rating Germany as if it will stay on the sidelines. In that it is endorsing a certain form of the Zone with Germany's rating. The Zone is left with an EFSF (Europeans Finding Safety For-now) floundering. A fund has a hard-time getting a rating better than those that back it. And the bulk of the backing for the still AAA rated EFSF is from less than AAA-rated countries in the aftermath of the S&P downgrades.  How long can that last? If it lasts surely it limits any gain in size if the rating is to be upheld. Bye-bye fund flexibility.

Euro takes a hit

The euro fell sharply, hitting an intraday low of $1.2623, its weakest level since late August 2010. The euro has lost more than 10% against the dollar since late October. It is one of the main casualties of the downgrade process though it’s a casualty that will help to boost growth.

You can’t shrink yourself to prosperity

S&P did have the insight to see the limits to the ‘Germanization’ of EMU policy, saying. "We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues."

2-Tonic is wrong elixir?

EMU’s policy thrust has been Teutonic, well too-Teutonic throughout the Obama Presidency. Even the UK adopted it as part of some pied piper progression (although Wagner does not usually have that effect on people) in the wake of Obama’s first G-20 summit.  Had Europe and the G-20 instead accepted the Obama plan for stimulus at Obama’s first summit, global growth would be better now and government revenues would be higher. Unemployment would be lower and yes debt levels higher but debt ratios would probably not be as bad as they are now. And all this angst about it, in all probability, never would have arisen. Countries would not be like a wolf caught in a trap pondering gnawing off one foot to go free. But that is what has become of Europe.

The easy way out

We see this on Wall Street a lot. When a firm gets in trouble and starts missing its earnings it starts cutting expenses. In the financial industry and many others it is the easiest thing to do. But the trick is to cut in a way that does not harm revenue growth. The real trick when earnings miss is to expand sales but few firms have that acumen. Cutting is easier and that is true for countries too. Got a budget problems Raise taxes! Cut some expenses! Does that hurt growth? Probably but you get some kudos for taking a tough step even if it is in the wrong direction. European taxes already are so high they among the eight wonders of the world. They are about to get ‘K’ status as a new peak. But don’t try to climb them.

S&P does Zone disservice

In the END S&P has executed a bunch of downgrades that do not add up to much. The real issue is not that the EMU has not done enough but that it has no sense of what it is doing and where it is going. Until the Zone has a sense of common purpose (other than not drowning and not letting the weak drag down the strong) it cannot be successful and there will be more downgrades to come. Germany should not be rewarded for sitting on the sidelines. Keeping its AAA just gives it something to defend and makes it less likely to throw its lot in with the rest. Germans are going to think that staying on the sidelines is a good policy. It is not. Or to put it another way, it is not, if the e-Zone wants to survive intact. But what does that mean? Who or what is the ‘e-Zone’ and, in that sentence, what DOES it WANT? The Zone is not a thing. It is a concept. And each member has in its mind a different concept. And that is why in the end it fails. S&P has done EMU no favors especially not by playing favorites with the downgrades.

   

A better consumer is more than a rumor! U of M survey jumps

Expectations and current conditions rise sharply

 

The U of M Survey’s expectations component is make the sharpest rise in all of this recovery period. The five month rise in the expectations reading is the greatest five month rise since the period ending in December 1992. Still, with this gain sentiment is not at a new cycle high. The cycle high stand s at 76.

Current conditions have improved sharply as well. The five month gain was previously larger in the five month period ended in January 2010. At a level of 82.6 the current index is also shot of the cycle high reading which is at 86.9.   

But the charts tell the story of momentum. And there are aided by stories of corporate leaders finally getting ready to hire.

CEOS apparently are undeterred by the risk in Europe. US consumers not surprisingly are not being affected by talk of a Euro collapse. See story (http://www.bloomberg.com/news/2012-01-13/hiring-logjam-breaks-as-ceos-plan-fastest-u-s-growth-since-2006.html). Indeed even Europe is not much affected as its bond auctions have picked up the wake of the ECB giving banks three-year credit lines. Even the recent LEIs (Leading Economic Indices) from the OECD did not find a whiff of recession. To be sure the OECD gauges see many slowdowns but they were not projecting recessions as of November data.

Trade data from Europe tell a story of an export bulge that is hard to understand. Meanwhile US trade data show exports are losing momentum.  US imports are holding up better but hardly are they surging, with the exception of oil.

To be sure the global markets are a series of cross currents. But the US consumer data is some of the best stuff we have seen so far. Since December 2006 there have only been two times when the Bloomberg weekly consumer comfort index which has risen in 10weeks by 8points has exceeded such a gain. We can be pretty sure when various measures of confidence using different survey questions and horizons begin to tell a similar story. We know have not really good eye witness news and come corroborating evidence.

EMU trade surplus surges-jump as reliable as a politician's promise

EMU seems to have posted a one-off result. Imports continue to erode in-line with other reports on economic weakness in the Zone but exports have sprung to life like a thought-to-be-dead vampire springing up from the grave on a foggy night. Gotcha! But this is unlikely to be a reversal of trend. Exports and imports have been in a slowdown mode for some time. Imports actually did strengthen as well going from -0.7% in October to flat in November

Import growth has been weaker than export growth for some time and this configuration has resulted in a widening of the EMU trade surplus, a surplus that jumped this month to €6.1bln in November from €0.5bln in October. The surplus was the largest since July of 2004 and could go a long way toward boosting what has been promising to be weak growth in EMU in 2011-Q4.

Still, the bottom line is that European exports simply have no strong demand to sell into in order to main their pace. The global economy is slowing so the month’s result really hangs its hat on the notion of quixotic forces rather than unexpected surging fundamentals. Indeed, it’s probably more likely that a Zombie will jump out of his grave undead than that EMU exports will maintain their strength.

Markets will puzzle over this number and it is a good number though surprising and beyond belief. The next question is about December and if December will prove to be an unwind of this spurt that brings the average back to earth as timing asymmetries settle back to normal or if some inexplicable bulge in activity will remain.  But not get up false hopes on this report.

Oil slickens the deficit path for US trade as exports drop

US trade deficit surges on OIL

…erodes without it

 

The trade deficit in November widened sharply from $43.2bln to $47.7bln. This one month $.4.5blm widening will knock something off GDP unless it comes back to us as inventory gains, which ahs been a common occurrence.

Exports fell by 1.2% in Nov while imports rose by 1.3%. Excluding petroleum exports fell by 1.2% and imports snaked up by 0.1% making the point that with or without oil the trade deficit got worse. 

With this report the ebullience of exports is thrown into question as three-month  export growth is now negative and exports are in a clear downward path of deceleration with growth rates of 10.3% over 12-months, 2.4% over six-months and -0.5% over three-months. The global growth slowing is hitting the US. Meanwhile, the US growth acceleration is boosting imports whose growth is 12.7% over 12-months and fell to -0.6% over six months but has sprung back to 4% over three-months. 

Landed oil prices rose by 3.7% in the month as the volume of imports surged by 4.5% a lethal combination for the deficit. The non-petroleum deficit worsened by about $1.5bln.

Retail sales, Jobless claims, Inventories and LEIs- A less than happy New Year start

Happy New year…Data show some sputtering

As 2011 closes and we raise the curtain on 2012 economic reports have begun to post some numbers that are more disappointing than encouraging breaking a sting of encouraging reports that has spanned about three-months.

Retail Sales

Retail sales disappointed in December, rising by just 0.1%. While this is a correct characterization it is also only part of the story. The December number is preliminary and evidence is that inflation was very low making that low nominal gains worth more in real terms (or volume terms). Also November was revised to a gain of 0.4% from 0.2% initially. Moreover we has strong September October gains that were built upon and did not reveres making the accumulated gains in the Third and fourth quarters quite good. Year-over year sales are strong as well. While the December numbers disappointed we are best off in not taking that too much to heart- it’s not like December produced a devastating decline after all. Sales are still advancing and the course in the value of sales may very well have fallen through the cracks due to inadequate methodology to capture discount buying.

Jobless claims

Claims rise sharply by 24K and are up to 399k just short of the 400K mark. But in the last few years claims have also been rising early in the year. Claims are notoriously difficult to get right each and every week. We will look for some context and another weeks work of data before we take seriously the degradation in the trend.

Inventories

Inventory data from November write a slightly different story about retail sales. In November retail inventory to sales ratios reached a five year low. Obviously compared to what they were expecting this was been some very good news on sales (though Nov). Clothing and accessories as well as General merchandise retailers had ratios in the bottom 30% of their five year range. These statistics suggest that sale in November left stocks relatively lean ahead of the key December selling season.

OECD LEIs

The OECD LEIs were below 100 for most key nations but that only suggests a slowdown. As of November that Italy was the weakest relative to tis trend and that left the Italian indicator down by just 1.5% relative to trend. China’s trend retailing clung to a trend-even 100 reading. On balance the OECD report which has data though November was not making the call for any recession. In Europe for the most part reports in Europe showed some improvement in December either rising or falling by less. So the OECD still is not pulling the trigger on the recession call even though Germany’s GDP signaled a small decline in its early Q4 estimate.

Mario Draghi and the magical euro-auctions

Is the ECB’s Draghi too smart by half

…or are we too dumb by full measure?

Auction madness! Markets are breathing a sigh of relief today as Spain’s and Italy’s bond auctions went off strongly. But this is with a huge assist from the ECB. Its 3-Year loans have pumped liquidity into banks who in turn are buying their government’s bonds. So while the ECB is not buying them directly in large amounts as the ECB is prohibited from doing. Thus the ECB is building up large claims on banks whose balance sheets are being stuffed with the same assets the ECB cannot but directly. Is the ECB better off having claims on unsteady banks rather than buying the government paper directly? Who can say. But the ECB also is giving away money for all sorts of uses as well under this program. A number of banks seem to be borrowing then turning around and warehousing it on the ECB balance sheet waiting for more choice opportunities to emerge.

Is anybody really enamored of this strategy?

Who is it fooling?

The interbank market is a Japanese lunch box not a bowl of soup- One thing the large ECB deposits tell us is that banks still do not trust one another. Yet the ECB is funneling HUGE amounts of money to government bond markets by means of taking the credit of these same banks as intermediaries.

Mixed signals with a clear message- But since banks are buying Euro-govy bonds hand over fist we are led to believe (wink, wink) that the crisis is over or losing intensity! But the Euro-depositing at the ECB tells us just the opposite does it not?

Who is being played for the fool?

Typo knows best- Let me share an inside joke with you. When I wrote this the first time I found a typo. I had written that the ECB has ‘pimped’ money into the markets. Of course, I hurried to correct that. But, on second thought, that typo reflects better economic analysis than saying it pumped it. What do you think?

Euro auctions Vs US auctions which are more telling? - Indeed, contrast the Euro auctions to the US where the 10-year government note auctions, with somewhat less direct help in the US, set a new auction-yield low on a high bid-cover ratio (over three and above the average of the last ten 10-Yr auctions). Here in the US the economy is (...well until today it was) spitting out nothing but strong numbers and the investors are STILL clamoring to buy them at historic yield lows! What does that tell you about competitor markets where yields are higher and banks are getting bashed with the stick and fed with the ECB carrot-loans?

The slippery slope to fund grandmother’s bank- We can wonder about how much the Germans like the ECB’s under the table and through the markets approach to investing in Grandmother’s bank and her sovereign bond market. It may be better than arguing dysfunctional capital markets that are short-circuiting monetary policy in order to justify large direct purchases of government bonds by the ECB. But probably not… Now the ECB has arranged a situation in which not only are there a lot more govy-bonds in the market but the ECB is entangled with more banks and banks of poor credit quality.

How can that be good?

Rules are rules; write outside the lines at your own peril…and ours - The bottom line is that Europe must get its house in order. The more it finds another end-run around rules enabling it to inject funding into places where market players left to their own devices would not go, the worse off we all are.

Draghi and his baggage- So is Draghi really that smart or is he too smart by half. Oh, he is an ivy-league US trained economist. But we have seen what a lot of those guys do and what they know. They do know ‘their stuff’ they also know the politics and have their own good-ole boy network. And Draghi seems to be working his overtime.

God bless him/God Help him…but, good God, stay way from what he is doing!

His policies are kind of a drag…hi.

The ECB and Fitch have their Deja-What? moment

ECB and Fitch have their Deja-What? moment

The ECB should buy more member debt? Really? I don’t understand the reverence for the rating agencies. I don’t even know what Fitch thinks is its mandate. But whatever it is I don’t see how today’s Fitchism makes any sense or helps to restore the shine to the reputation of credit rating agencies. If Fitch thinks it is carrying the ball for them, Oops! It just stepped out of bounds.

The ECB is a central bank that has been built on the model of the old Bundesbank. Fitch is aware that the Germans do not want the balance sheet expanded, risking the viability of the currency and the integrity of the central bank.

So why has Fitch steeped into the Euro-spat to holler for the ECB to do more?

Certainly someone in Europe needs to do more. But what not scream at the Germans or at the French or at EcoFin for not making some better arrangement? Or the member countries themselves for not using the IMF? Granted the ECB is a financial institution that could snap its fingers and do this bidding. But as Freddie Prince used to opine, ‘hey, man it’s not my job.’ And it isn’t. Not one thinks that some ECB bond buying is going to stoke inflation now but that is not the issue.

The whole opposition by the Germans to this balance sheet expansion and the opposition by those here in the US and within the Fed (and outside) to blowing up a balance sheet now, and to erode the credit quality of its holdings, is to avoid engaging central banking in fiscal policy. This action gets the politicians off the hook to do something and later embroils the central in the criticism of political meddling. Central banks should only jump into this breech when there is a clear and present danger and systemic risk.

Indeed, in the case of the ECB, it is prohibited by its charter from doing exactly what Fitch asks of it ( Duh!?). The ECB’s current buying of so much sovereign debt rests on a very thin, very tenuous assumption that the very different yields in different government bond markets reflects a distortion in the monetary transmission mechanism. RIGHT. Actually nothing could be farther from the truth. It is evidence that markets are in fact working, Investors are discriminating. What it represents is the perception and existence of greater credit risk in some government markets compared to others. So why should the ECBC go there if other sovereign governments or the IMF will not make loans and if countries will not adopt stringent enough austerity programs?

Why is Fitch urging the ECB to do something now for which it may later castigate the ECB and ratchet down its credit rating later?

It beats the heck out me, how about you?.