Frontrunning: July 23
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World View & Market Commentary.
Forest first; Trees second.
Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.
Irish Relief Fleeting as ‘Day of Reckoning’ Nears: Euro Credit
Nov. 26 (Bloomberg) -- Borrowing costs for Europe’s most indebted nations are at record highs as Ireland’s capitulation in accepting a bailout of its banking industry stokes concern that other countries also will have to seek aid.
The average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.56 percent today, a euro-era record. The average premium investors demand to hold those securities instead of German bunds widened to 488 basis points, the highest level of 2010. The average cost of insuring against default by the five nations using credit- default swaps reached a record 517 basis points on Nov. 23.
“It’s no longer taboo to speak about a restructuring,” said Johannes Jooste, a portfolio strategist at Bank of America Corp.’s Merrill Lynch Global Wealth Management in London, which oversees about $1.4 trillion for clients. “The fact that bond yields continue to rise and put pressure on countries that have to fund from the market makes investors less and less confident, and it’s bringing forward the day of reckoning.”
The Nov. 22 relief rally after Irish Prime Minister Brian Cowen conceded that the nation needed financial support proved transient. Irish 10-year bond yields fell 4 basis points, before jumping 100 basis points as of 11 a.m. today, exceeding 9 percent for the first time since 1995. The euro’s respite was more fleeting; the bailout inspired a 0.8 percent gain for the currency before it slumped to a two-month low. It fell 0.9 percent to $1.3238 today.
“When Ireland accepted help, the general feeling in the market was that this could restore some calm; that hasn’t been the case,” said Michiel de Bruin, who oversees about $35 billion as head of European government debt at F&C Netherlands in Amsterdam. “Authorities should be doing their utmost to calm the situation.”
Analysts at Morgan Stanley said in a Nov. 11 report that any move by Ireland to use the European Financial Stability Facility would boost the euro and be a “circuit breaker” for the European sovereign debt crisis. While Ireland has enough money to pay its debts until the middle of next year, it has requested a bailout from the European Union and International Monetary Fund amid concern the cost of rescuing its banks would overwhelm government finances.
Portuguese Finance Minister Fernando Teixeira dos Santos said in an interview published today that EU governments can’t impose a bailout on his country.
A majority of euro region officials and the European Central Bank are putting pressure on Portugal to accept aid that helps stop contagion spreading to Spain, the Financial Times Deutschland reported today. German government spokesman Steffen Seibert said the nation isn’t pushing Portugal to seek aid. An official at the office of Portuguese Prime Minister Jose Socrates also denied the report.
Spain Bets on Budget, Home Investors to Stem Contagion
Nov. 26 (Bloomberg) -- Spain is counting on budget cuts and domestic appetite for its bonds to build a firewall against contagion as Prime Minister Jose Luis Rodriguez Zapatero warned investors would lose money betting against the nation’s debt.
Spain, which has the euro region’s third-highest budget deficit, says it won’t adopt new measures to protect itself from Europe’s worsening debt crisis after cutting the central government’s budget gap by almost 50 percent and taming regional spending. Providing support is about half of Spanish debt is held at home, more than in Ireland or Portugal, offering a line of defense against changes in foreign investors’ moods.
“I should warn those investors who are short-selling Spain that they are going to be wrong and will go against their own interests,” Zapatero said in an interview with Barcelona-based broadcaster RAC1 today. He “absolutely” ruled out Spain would need a rescue.
In surprisingly good news for the housing sector, applications for home purchases surged 14.4 percent in the November 19 week. The report says the increase, which lifts purchase applications to their highest post-stimulus level, suggests consumers are feeling more confident with their own finances. Yet calendar effects surrounding the Thanksgiving holiday may be it magnifying the gain, one that will have to be confirmed in subsequent weeks. The refinance index isn't showing any lift, down 1.0 percent to hit its lowest level since June. Rates were mixed in the week with 30-year mortgages rising four basis points to 4.50 percent. Next data on the housing sector will be new home sales for October to be posted at 10:00 ET today.
While the consumer sector looks good today from personal income and jobless claims, manufacturing has taken a step back. Durables orders in October fell 3.3, following a 5.0 spike the month before. The October figure came in notably below the median market forecast for a 0.1 percent decline. Weakness was broad based but led by transportation. Excluding transportation, durables declined 2.7 percent after rising 1.3 percent in September.
By major industries, transportation fell 5.2 percent in October after surging 16.5 percent the month before. The drop was mainly in defense aircraft but nondefense aircraft and also motor vehicles orders eased. Other industries generally declined but mostly after a moderate gain in September.
Orders for equipment investment are showing notable volatility. Nondefense capital goods orders excluding aircraft in October declined 4.5 percent after rising 1.9 percent the previous month. Shipments for this series slipped 1.5 percent, following a 1.0 percent gain in September.
Today's durables report is a disappointment but should be viewed in the context of being one of the most volatile monthly series for a major indicator produced by the government. Also, a weaker dollar points to likely improvement ahead for durables orders and manufacturing.
The consumer is making a moderately strong comeback in October in both income and spending. Meanwhile, core inflation is subdued and still too low for Fed comfort. Personal income in October posted a healthy 0.5 percent gain, following no change in September. Income growth topped analysts' forecast for 0.4 percent increase. Importantly, the wages & salaries component jumped 0.6 percent, following a 0.1 percent improvement the month before.
Household spending also showed strength. Personal consumption expenditures rose 0.4 percent, following a 0.3 percent increase in September. For the latest month, strength was led by a 1.9 percent monthly spike in durables. Nondurables advanced 0.8 percent while services edged up 0.1 percent.
Year on year, personal income for October came in at up 4.1 percent, compared to 3.7 percent in September. PCEs growth slipped to 3.6 percent in October from 3.8 percent in September.
PCE inflation nudged up at the headline level but the core remained anemic. The PCE price index increased 0.2 percent in October, following a 0.1 percent uptick in September. The core rate was flat for the second month in row. On a year-ago basis, the headline number in October was 1.3 percent, down from 1.4 percent in September. Meanwhile the core was 0.9 percent, down from 1.2 percent the prior month.
Relative to typical recoveries, the rebound in income in income and spending is still sub-par but at least we are seeing some strengthening. Retailers and policy makers should be happy that the trend is up.
Seasonal factors tied to Thanksgiving may be at play yet the trend for jobless claims is clearly positive. Initial claims fell 34,000 in the November 20 week to a far lower-than-expected level of 407,000 (prior week revised slightly higher to 441,000). The four-week average is down 7,500 to 436,000 for a nearly 20,000 improvement in the month-ago comparison.
Continuing claims fell for the third week in a row and at 142,000 posted their biggest decline since July. The four-week average fell 51,000 to 4.309 million. The unemployment rate for insured workers fell one tenth to 3.3 percent for its lowest rate of the recovery.
Claims readings, due to the problem of making weekly adjustments in shortened weeks, start to get cloudy during the holidays. This puts the focus on the four-week averages which are offering a strong signal for rising payroll gains.
The recovery is not quite as sluggish as previously believed. Third quarter GDP growth was revised up to 2.5 percent annualized growth from the advance estimate of 2.0 percent. The revision came in higher than analysts' expectation for 2.4 percent. The upward revision was primarily due higher estimates for personal consumption, producers' durable equipment & software, exports, and federal government spending. Partial offsets were seen in a lower estimate for residential investment, nonresidential structures, inventories, and a higher figure for imports.
Importantly, demand numbers were revised up. Final sales of domestic product were boosted to 1.2 percent from the initial estimate of 0.6 percent. Final sales to domestic purchasers were bumped up to 2.9 percent from the original figure of 2.5 percent for the third quarter. Importantly, PCEs growth is a stronger 2.8 percent, compared to the advance estimate of 2.6 percent.
Year-on-year, real GDP in the second quarter is up 3.2 percent, compared 3.0 percent in the second quarter.
On the inflation front, the GDP price index was unchanged from the initial estimate of 2.3 percent. The consensus forecast was for 2.3 percent.
The bottom line is that the recovery has regained some momentum with the consumer sector taking on a little more of the growth burden. Final sales to domestic purchasers are moderately strong and overall sales of domestic product should pick up if the weaker dollar boosts exports-a decent probability. But growth is still sluggish relative to what is needed for improvement in the labor market.
On the news, equities were little changed. Futures remained notably negative due to saber rattling on the Korean peninsula.
In October, the Chicago Fed national activity index improved to a reading of minus 0.28 from minus 0.52 in September. Three of the four broad categories of indicators that make up the index made small positive contributions, while the consumption and housing category continued to make a large negative contribution.
The index's three-month moving average, CFNAI-MA3, decreased to minus 0.46 in October from minus 0.33 in September, reaching its lowest level since November 2009. October's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend for the fifth consecutive month. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. Production-related indicators made a contribution of plus 0.08 to the index in October, up from minus 0.12 in September. Manufacturing industrial production increased 0.5 percent in October, up from a 0.1 percent gain in the previous month; and manufacturing capacity utilization increased to 72.7 percent in October from 72.3 percent in September