Wednesday, October 31, 2007

German Retail Sales September 2007

According to provisional data from the Federal Statistical Office, turnover in retail trade in Germany in September 2007 was down in nominal terms 1.2% and in real terms 2.2% when compared with September 2006. And this included one extra day, since the number of days shops were open for sale was 25 in September 2007 and 26 in September 2006.

When adjusted for calendar and seasonal variations, the September turnover was in nominal terms 2.6% and in real terms 2.3% larger than that of August.

Compared with the corresponding period of the previous year, retail during the first nine months of 2007 was down 0.9% in nominal terms and 1.6% in real terms than during the first nine months of 2006.



German Employment and Unemployment September 2007

According to provisional results of the Federal Statistical Office, the number of persons in employment in Germany and whose place of residence was Germany was approximately 40.05 million in September 2007, that was 676,000 persons more (+1.7%) than in September 2006. The number of persons in employment hence continued to increase strongly thanks to a good short-term economic trend and a positive development on the apprenticeship market.

Compared with the previous month of August 2007, the number of persons in employment was up by 341,000 (+0.9%) in September 2007. Seasonally adjusted, that is upon elimination of the typical seasonal fluctuations, employment rose by 36,000 persons in September 2007 on the previous month.

The employment/population ratio, that is the share of persons in employment in the total population aged 15 to 64 years, was 70.7% and thus continued to be above the European employment target agreed to be achieved in line with the so-called Lisbon Strategy by 2010.

In addition to calculating the number of persons in employment for reference month September 2007, the monthly and quarterly employment data published so far were recalculated back to February 2007 as part of the regular revision of national accounts, taking account of all sources of employment statistics now available. Altogether, the recalculation required changing the previously published monthly employment figures by a maximum of 0.1%.

Apart from the usual employment reporting, the Federal Statistical Office is now providing again an extended range of monthly unemployment data according to the internationally comparable ILO concept. The new time series is based on additional monthly processings of data from the Europe-wide harmonised labour force survey. This is the first time that monthly unemployment data are available for Germanyfrom that statistics which is carried out in a harmonised form at the EU level. For further information please refer to the methodical explanations at the end of this press release.

According to the results obtained by the method described there, a seasonally adjusted 3.51 million persons were unemployed in September 2007. That was a decrease by 600,000 (–14.7%) from September 2006. Accordingly, the seasonally adjusted unemployment rate harmonised according to the EU definition – measured as the share of unemployed in the total labour force – was 8.1%, which was considerably lower than a year earlier (9.6%).

Wednesday, October 24, 2007

Italian Business Confidence October 2007

Italian business men are slightly more optimistic this month than they were last month. This is the only real significance that can be attached to the latest reading on the ISAE business confidence index. Equally you could say that they were unduly short-term pessimistic last month given all the financial turbulence that was being commented on in the press. In the medium term all this will have consequences, but they are not being felt as acutely in the short term as many imagined.



The Isae Institute's business confidence index rose to 92.9 from a revised 92.4 in September, the Rome-based research center reported today. Manufacturers were more optimistic about their current prospects for production, with the relevant measure rising to minus three from minus seven, Isae said. Still, the report reveals considerable pessimism about prospects for the future. A measure of expectations for future orders fell to minus seven from minus six in September, and of particular note a measure of foreign orders fell to minus 10 from minus seven.

Tuesday, October 23, 2007

Eurozone Industrial Orders

As I said in the last post, little by little we are now going to start getting eurozone data. Today Eurostat released the August new industrial orders data.

According to the report:

The euro area1 (EA13) industrial new orders index2 rose by 0.3% in August 2007 compared with July 2007. The index fell by 2.6% in July3. EU271 new orders increased by 1.0% in August 2007, after a decrease of 3.5% in July. In August 2007 compared with August 2006, industrial new orders increased by 5.1% in the euro area and by 8.2% in the EU27.

In August 2007, among the Member States for which data are available, total manufacturing working on orders rose in seventeen and fell in three. The highest increases were registered in Poland (+81.6%), Hungary (+33.3%) and Lithuania (+28.2%), and the only decreases in Denmark (-18.4%), Italy (-1.8%) and the Netherlands (-0.4%).


What stands out here is the clear difference between Western and Eastern Europe. Eastern Europe is still accelerating - overheating considerably some would say - while Western Europe is slowing visibly.

Among the eurozone countries which are most notably slowing at the moment I would single out Italy, Germany, Greece and Spain for rather close attention. Germany and Italy have long had their growth ups and downs, which have in the last decade been more downs than ups, but Greece and Spain (two of the three construction boom countries, the other being Ireland) have normally maintained a fairly strong profile through the downturns, and this has tended to take some of the edge of the recent weak periods. This time it may well be different, since the construction driven economies may well be even more affected than the "usual suspects", something which makes this downturn an even more problematic one.

Now if we look at the evolution in orders in recent months, we can see that everyone has been slowing to some extent (less growth, rather than outright contractions) and the German case particularly stands out for the much lower rate of expansion in new orders following the very good period earlier in the year.





If we look at the month on month changes, I would single out just how evidently Spain has been slowing, and the strong underlying weakness which is being revealed in Greece.




The general German picture is only confirmed if we look at the data released today from the Federal Statistics Office which shows that building activity in Germany decreased 4.4% in real terms in August 2007 when compared with August 2006.

As reported by the Federal Statistical Office, the total price-adjusted value of orders received by building construction and civil and underground engineering enterprises in Germany decreased 4.4% in real terms in August 2007 from the same month of the previous year. In building construction demand slumped 7.6%, in civil and underground engineering it fell 1.3%. The number of employees amounted to 713,000 at the end of August 2007. That was a decrease of 28,000 (–3.8%) compared with August 2006.


This situation is clear enough if we look at the chart for German construction activity since the end of last year, using the Eurostat monthly data which only runs to July (ie to before the "financial turmoil" of August). The slowdown from the previous boom is clear enough. Now it only remains to be seen how far it goes.


Italian Consumer Confidence Index October 2007

Well the real data that everyone has been waiting for on the eurozone is about to come rolling in, but just to keep us occupied in the meantime, we have another sentiment indexto look at, this time it is the Italian Consumer Confidence one.

Italian consumer confidence in October was unchanged from September as higher energy prices and signs of slowing economic growth weighed on optimism. The Rome-based Isae Institute's index, based on a poll of 2,000 households, held at 107.3, the same as last month.



It's hard to know what to make of this reading at this point. As I have often said I don't think we can eak too much pleasure or pain out of any one single data reading. The index level is, of course, still well down on the highs registered earlier in the year, and most of the real economic indicators are on their way down, with the exception of unemployment, of course, but I have already addressed this apparent anomaly here.

Wednesday, October 10, 2007

Germany Factory Orders August 2007, Construction PMI

Well despite the fact that someone claims they have not enough data to make a judgement, evidence continues to mount of a slowdown in the eurozone and particularly in the key German economy. So, for those of you with a strong stomach, here is a bit more. First off, new factory orders in Germany, where manufacturing orders rose less than many economists had forecast in August after the euro's gains seem to be making exports less competitive while domestic spending follows its now traditional flat pattern..

Orders, adjusted for seasonal swings and inflation, rose 1.2 percent from July, when they dropped 6.1 percent, the Economy and Technology Ministry announced at the end of last week, based on data from the Bundesbank. The July decline, which was revised up from a 7.1 percent drop, was still the largest since at least September 1991. Particularly striking was the 10% drop in foreign orders noted in July over June.



As can be seen the level of orders has fallen back considerably from the, admittedly, very high level achieved in June.

If we now look at the construction PMI we can see a similar picture:



As can be seen, given that 50 is the dividing line between contraction and expansion, construction has been in contraction since February.

If we now take a quick glance at the manufacturing PMI:



We will see that while the German manufacturing sector is still expanding, the rate of expansion has been slowing steadily since the spring. I would say all the pointers are now there to show that a rapid slowdown is taking place in the German economy.

Are Prodi's Proposed Italian Budget Cuts For 2007 Too `Modest'?

Such at any rate is the opinion Bank of Italy Governor Mario Draghi holds of Prime Minister Romano Prodi's 2008 budget. He stated yesterday that the budget proposals fail to cut spending and sufficiently reduce what is effectively the biggest government debt in the EU.

"Progress on deficit cuts is modest" Draghi said during testimony in Rome's Senate. Next year's proposed budget "doesn't take advantage of an increase in tax revenue to accelerate debt reduction" and puts at risk the objective to balance the budget by 2011.


Romano Prodi has proposed a spending package that cuts housing taxes, lowers levies for poor families, and boosts spending on public works, while polls indicate his popularity is sagging to an all-time low. All the members of Prodi's nine-way coalition resisted spending cuts, and some are threatening to vote against the budget - and the government - if the Prodi refuses to scale back plans to contain pension costs.

Draghi's criticism comes just two days after European Union Monetary Affairs Commissioner Joaquin Almunia said Italy's budget wasn't "ambitious" enough in it's attempts to tame the deficit and debt, which is forecast to fall to 105 percent of gross domestic product this year from 106.8 percent in 2006.

Also it comes hot on the tail of a decision by the EU finance ministers to urge the Debt Rating Agencies to be more vigilant. I'm sure the Italian case was not in the forefront of their minds when they took this approach, but as Claus Vistesen observes rather wryly, the Italian representatives may well have been sitting at the table with some uneasiness during this entire discussion.

Rather significantly Standard & Poor's said last week that the current budget plan won't alter its rating outlook, and it predicts Italy may fail to meet its goal of bringing the debt below 100 percent of GDP by 2010.

"In the absence of any significant structural reforms, Standard & Poor's believes that the government will fail to meet its target debt level of less than 100 percent of GDP by 2010" the rating agency said in a press note, and I'm sure the EU finance ministers said "quite right too".

All of this follows hot on the heels of declarations by Italian Finance Minister Tommaso Padoa-Schioppa that substantial tax cuts will only be possible once the government slashes interest payments on thedebt by half.

Italy's debt is "gigantic" and costs Italians 1,200 euros ($1,700) each annually, Padoa-Schioppa told the Italian Senate last week. "Halving debt servicing costs to 35 billion euros could free up money for cutting taxes..... but for now, interest expenses and widespread tax evasion limit the government's ability to trim taxes".

"We know that taxes are high in Italy.....No one brings up the fact that these two issues make our case truly singular."

Italy last year spent 69 billion euros servicing the debt, an amount that is twice the size of Slovenia's entire GDP.

Something to (dis)agree on?

by Claus Vistesen

cross posted from Alpha Sources


Whether or not the the recent ECB meeting provided some kind of a breather to an otherwise volatile EUR/USD currency pair is of course debatable. With the EUR/USD today trading just shy of 1.40 it could seem as if the current level will remain for the next couple of weeks. However, volatility is looming ever so much in the background threatening to take the EUR/USD up towards 1.45 which really would cause problems all over the place in the Eurozone pending of course on what happens in the US and at the FED. In fact, quibbles and niggles have already emerged as we have all observed in recent weeks and uncertainty is set to linger on the back of the ECB's 'all-doors' open approach. Clearly, only very few expect the ECB to actually raise (Bartsch' recent note is good) but what if the Fed sees room for lowering further? In short, expectations of interest differentials driven by economic reports and general indicators are the stuff to watch at the moment I think as main driving forces keeping the EUR/USD in a band between 1.40-1.45. Yet, how big of a problem is, in fact, the perky Euro? Well, we all know Monsieur Sarkozy's position and even the ever so faithful squire to the ECB Angela Merkel has also been busy on the phone with Brussels talking about what "to do". All this uncertainty and worried minds also regarding, I would reckon, the global economic environment in general was epitomized in the preparations to next week's meeting of the currency-manipulating club galore (hint; the G7). In this way, the Euro finance ministers, as reported by Bloomberg, found it mighty difficult to come to a common conclusion on the strong EUR/USD ...

European finance ministers failed to find common ground on tackling the euro's appreciation to a record against the dollar as they prepared for next week's meeting of the Group of Seven nations.

``I prefer a strong euro,'' Germany's Peer Steinbrueck told reporters at a meeting of euro-area finance ministers in Luxembourg today, a comment echoed by counterparts from the Netherlands and Austria. France's Christine Lagarde, whose government has said the European Central Bank should do more to curb the currency's gain, said she doesn't feel isolated as she arrived for the gathering.

Officials from the 13 nations that use the euro differ on how to respond to the currency's rally, which French President Nicolas Sarkozy says threatens to hurt an economy already confronted by a rise in credit costs over the past two months. While Lagarde said last week she will push for the central bank to sell euros, ECB President Jean-Claude Trichet has so far refused to signal increased concern about the currency.

Now, as should be well known for those of my readers with only the faintest idea of group dynamics, internal disagreement between members of group can be effectively solved with the invocation of a common enemy. Exhibit one for the relevance of this Freudian pocket analysis of mine is to be found in the common statement from the same meeting in Luxembourg between European finance ministers about sanctioning and essentially re- schooling the naughty boy of the class of the current market turmoil, the rating agencies. Now, one of the implicit narratives here and this should never escape our attention is also that the rating agencies have been too slow to downgrade too risky debt thus implying that the agencies' standards towards credit ratings should be tightened. I imagine that the Italian representatives have been sitting at the table with some uneasiness during this discussion. However, the real treat of the finance ministers' meeting was of course, and despite the inability to reach agreement on the EUR/USD question, the call for China to appreciate the remninbi; they even so far as to pull in the Yen too in this discussion which makes you wonder whether the finance ministers have actually been looking at what is going on in Japan. Yet, on the question of the remninbi the minister' call might be more warranted. Brad Setser has some timely analysis based on a recent article by the Economist's European correspondent Charlemagne. In the context of those famous global imbalances which is of course Brad's speciality he particularly makes one interesting point ...

China cannot run a large surplus with Europe without financing the US since its surplus with Europe reflects its decision to limit the pace of the RMB’s appreciation v the dollar, and thus to let the RMB depreciate v the euro. Nonetheless, the growing disconnect between China’s trade (increasingly with Europe) and China’s financial flows (still overwhelming toward the US) is a potential source of instability in a global financial system whose stability still hinges on large-scale Chinese financing of the US, at considerable (financial) cost to China ...

Clearly, China still ships a lot of widgets to the US but in percentage growth terms there is no doubt that the surplus with Europe has grown faster in the recent year. Another point which is clearly bound to emerge again and again with increasing force is the unwillingness of the Chinese authorities to let the remninbi appreciate even if the economy is beginning to nudge up the value chain. Or as Brad notes ...

There is another reason, beyond the RMB's depreciation, why tension is likely to rise: China is increasingly starting to produce products that compete directly with European and American products, not just with other low-wage economies. Think auto parts. Think autos for that matter. Europe makes a lot of machinery. Increasingly, so does China.

Of course, we can ask whether an appreciation of the remninbi would actually do much to reverse the flows but that is another question entirely and one which is best saved for another post.

Thursday, October 04, 2007

ECB Review and Preview

Well the ECB is scheduled to have its regular meeting in Frankfurt this morning so Jean Claude Trichet will finally have to face the cameras and pronounce. Claus will have a longer analytical review of the situation here by tomorrow (he already has an initial "state of play" post on his blog), so this will be an extended note basically providing some background charts and data.

Perhaps a good place to start would be with this quote from Wolfgang Munchau's recent Financial Times article which Claus incorporates in his post:

(...) I see relatively limited room for manoeuvre. The ECB’s official short-term interest rates will probably stay at 4 per cent for a considerable period. The ECB will not start to cut interest rates until inflationary pressures subside, and until there is some hard statistical evidence of an economic downturn. At present, this evidence is confined to sentiment surveys.


Now Munchau is probably right in the sense that the ECB has boxed itself in in a way which effectively leaves it very little room for manoeuvre (Bernanke and King in their different ways have found room for manoeuvre, but the ECB is the ECB), but I think he is not right in asserting that the only evidence we have to date of a slowdown in the eurozone economies comes from the sentiment indexes. There is increasing evidence from the world of the real economy which we may also look at.

But first of all, let's look at one part of the underlying problem, the level of effective interest rates now operating in the eurozone. As can be seen from the following chart of the 3 month euro Libor (London inter-bank overnight rates), these suddenly shot up in August, well above the ECBs target 4% rate, and they stubbornly show no sign of coming down.



So this is the background problem, the European banks are nervous about lending to each other, and this is going to make obtaining finance for all kinds of needs much more difficult.


The German Economy


OK. I mentioned data, so lets look at some of it. Firstly Germany.

Well as Munchau says, we do have sentiment indexes. The ZEW insititute, for instance:



or the IFO:




Then German consumer confidence also fell - in this case to the lowest level in five months - according to the GfK AG's confidence index for October. The index fell to 6.8 from 7.4 in September.



But as I say, there are real indicators. First off quarterly German growth since Q1 2006:



As can be seen the German economy has now been slowing since Q4 2006, and if we treat Q4 2006 (due to the pre VAT rise burst in activity) as something of an anomaly, then we can see a steady decline since Q2 2006. In the present global environment my opinion is that this trend is unlikely to be reversed.

There are other indicators, like retail sales, for example. Here's a chart of the monthly index for German retail sales since January 2006:



But perhaps most shocking piece of real data to come out of Germany is the decrease in the rate of expansion in German services revealed by the latest Royal Bank of Scotland Services PMI, which dropped from a level of 59.8 in August to one of 53.1 in September. Since services have played such an important part in the recent German boom this slowdown is deeply significant.



Italy

The Italian economy has "recession bound" written all over it. Firstly the Q2 2007 GDP already revealed a sharp slowdown:



On the sentiment side, consumer confidence in fact recovered slightly this month from recent declines:



But Italian business confidence fell to its lowest in almost two years in September. The Isae Institute's business confidence index fell to 92.2 from a revised 93.8 the last month.



And of course Italian retail sales dropped in September at the steepest rate in more than two years as economic growth visibly slows.

A seasonally adjusted index of retail sales was at 44.1 in September, its seventh consecutive contraction, compared with 47.8 in August, according to a survey of 440 retail executives compiled for Bloomberg LP by NTC Economics Ltd. The reading has stayed below 50, the level that signals a contraction in sales, since February.



Here's the retail PMI chart, and remember, any reading under 50 means contraction.




And of course there is services. In fact European service industries grew at the weakest pace in two years in September. The Royal Bank of Scotland Group revealed yesterday that its European services index fell to 54.2, the lowest since August 2005, from 58 in August.

Italian services hit a level of 53.9:




Spain and Greece

However, maybe it should come as no great surprise that the German and Italian economies are slowing. What is going to be new - at least in post EMU terms - about this slowdown is the fact that some of the formerly "stellar" economies in the eurozone - Spain, Ireland, Greece - will also slow, especially due to their dependence on the construction sector, and indeed they may well slow faster and further than all the rest.

Early indications of this are already coming out of Spain. If we look at the rate of mortgaging and the value of new mortgages we can see, although the most recent data we have at this point for July, signs of the beginning of a slowdown are everywhere. We can get some idea by looking first at the number of mortgages contracted each month.






Also we have the value of these mortgages in millions of euro.




Now the data we really need are the figures for September, but this means we won't really know the full extent of the initial hit on Spain till early December. Nonetheless some indication can be obtained by looking at what was happening before things seized up.

What we can see is that the property market in Spain really peaked towards the end of 2006. The market hit a bottom in April, but there was a rebound in May (offers from property promotors?). But the rebound was not sustained and then the market again resumed the downward march. All we need to know now is the extent of the damage in September, and how low can we go. I am not optimistic. This is with us for some timne to come, and will probably be - proportionately - much more important that what is happening now in the United States.

If we now move on to the sentiment indexes, we have a first data reading in the shape of the Spanish Consumer Confidence Index. Over to Bloomberg:


Consumer confidence in Spain declined to a record low in September after the fallout from the U.S. subprime-mortgage slump pushed up borrowing costs worldwide.

The Official Credit Institute's index of consumer sentiment dropped to 80.2 from 86.5 in August, the institute said today on its Web site. That is the lowest reading in a series that started in 2004.

The cost of inter-bank loans jumped in August after European lenders disclosed losses in the U.S. mortgage market. That pushed up payments for Spanish homeowners who have variable-rate loans tied to the 12-month interbank lending rate for the euro region.

``Spain is heading for a marked slowdown and by mid-2008 we expect it to be growing at decidedly below-trend rates,'' Dominic Bryant, an economist at BNP Paribas SA in London, said in an e-mailed note.

The 12-month Euribor rate jumped to 72 basis points above the European Central Bank's benchmark interest rate this month, twice the average spread since the debut of the euro. In Spain, 95 percent of home loans have variable interest rates.


Here's the chart:




and here's the chart for the sub-components:




What can be seen from this chart is that all the components reached a peak this summer in April and May, in June and July they were all down, but only to the level of February/March, then from July onwards the whole thing starts to subside, and who knows if we have touched bottom yet, since all the forward indicators are a bit more positive, but my feeling is that that is rather an indication of the fact that people still don't appreciate the gravity of what is happening. It hasn't sunk in yet, and people are still expecting the housing market to pick up in a quite unexpected fashion. Spain could face a hard landing. If things continue to move at this speed it will get one.

Also service activity in Spain, which accounts for some 60 percent of the economy, posted its slowest expansion in almost two years in September, according to a separate survey of executives by NTC economics. The index fell to 52.4 from 53.5 in August.



A similar picture can be seen in the manufacturing PMI, although manufacturing accounts for a much smaller part of total economic activity in Spain than in some other European economies.



In the case of manufacturing, the rate of expansion has been slowing since June, although some reduction of activity is normal in the summer. It is the September reading which should give cause for concern here.

At the present time we are simply talking about a slowdown in the rate of expansion, but how far is this now away from an actual contraction. Not very, I would say.

If we now, finally take a look at what we know about Greece, we could say that the answer is not very much. I can't find a consumer confidence index for Greece, and Bloomberg do not publish any PMIs. So Greece is a bit of a "dark zone" as far as data goes, and this isn't helped any by the lengthy delays exhibited by the Greek Statistical Office when it comes to official data releases. In general terms, as far as anything interesting goes, we are back in June or July at this point.

We do however have data on new building permits. The latest data we have is from June. Looking at the chart, the slowdown from the middle of last year is clear enough.




The year on year growth graph also says it all I think.





We don't have too many other measures for Greece at this point, but the Greek Statistical Office do use cement output as a proxy for the level of construction, and a glass at the volumes used does tell its own story.




Even though in June and July there was a recovery from the lower level of earlier in the year (when remember the government deficit reduction was affecting civil engineering projects and the interest rate tightening at the ECB new home starts), the level is way down across the board from a year earlier, as can be seen clearly from the year on year chart.




And remember all of this is pre the sub-prime turbulence in August, since the latest month we have any kind of data here for in July.

Conclusion

Well, despite the fact that we still have a long way to go before we get a full appreciation of the extent of the slowdown across the eurozone, I beg to suggest that at this point we have considerably more to look at than "mere" sentiment indexes.

So why, in the face of all this negative data won't the ECB turn tail today and start reducing rates, as for example the French administration and a growing voice within the European manufacturing industry community are requesting. Well as Wolfgang Munchau suggests they have boxed themselves in rather (and unfortunately Trichet is neither as adroit, nor as willing to face the music at this stage as Bernanke and King have proven to be).

DailyFx's Kathy Lien puts her finger on just the part where it hurts most I think:

Despite the European Central Bank’s reluctance to acknowledge the impact that a 1.43 Euro has on economy, the damage can already be seen. Earlier this week we had softer inflation and weaker confidence reports. Today German retail sales dropped 1.4 percent despite the fact that unemployment hit a 14 year low. Unsurprisingly, confidence in the region as a whole also deteriorated. The EU’s Junker has already said that the strong Euro is starting to be a great concern for the group. It seems to be only a matter of time before ECB President Trichet makes a similar comment. Why has the ECB been so stubborn? Today’s 2.1 percent flash estimate of consumer prices is a good reason. This is the first time in over a year that inflation has rose above their 2 percent target. Even though the rising Euro is suppose to reduce inflationary pressures, the even stronger rise in commodity prices is offsetting that impact. The ECB has a monetary policy meeting next week. Interest rates are not expected to be changed, but as usual keep an eye on the comments that ECB President Trichet makes at the accompanying press conference. He is definitely not expected to bring back the words strong vigilance, but at the same time, he may not be able avoid making cautionary or dovish comments particularly since many banks have been borrowing at the ECB’s penalty rate indicating that the credit markets have far from stabilized.

Wednesday, October 03, 2007

Tomorrow's ECB Meeting - Readying the Microscope

by Claus Vistesen

cross posted from Alpha Sources



Between the rumbling in financial markets, a EUR/USD touching an all time high, a French president smelling blood, and what seems to be subtle yet clear signs of a turning point in the economic fundamentals it has been difficult indeed to catch a breath as a Eurozone watcher. Now of course, we are nearing the proverbial end of the line and with tomorrow's ECB meeting we should expect to get some kind of indication of the kind of strategy the ECB is playing in a context of a EUR/USD on helium, down trending economic fundamentals, and of course the lingering threat of inflation. In this sense, it has not only been my colleague Edward Hugh (and myself) who have been looking for Trichet lately in order to dissect what he in fact intends to do and say about what is happening. Also for example Morgan Stanley has (Chaney is here), albeit ever so subtly, suggested that perhaps it was due time that monetary policy makers in the Eurozone began to correct to what seems to be the inevitable fundamentals. And speaking of those fundamentals there is certainly enough bad news to pick from. In Italy retail sales slumped to a two year low a trend mirrored in Germany where retail sales also fell. More generally the general index of manufacturing growth constructed by the Royal Bank of Scotland also fell recently.

In short and if there ever was a time to pull out the proverb of being stuck between a rock and a hard place now would be as good a time as any in the context of the ECB. Of course, none of this is particularly easy; especially not since the ECB is now, as has been the case before, faced with political pressure to do something and if there is something central markets and financial markets don't like it is when politicians fiddle with their business regardless of course whether in fact the advice might be prudent or not. In my notes linked above I have dealt with this quite extensively but I can also recommend a recent piece by Wolfgang Munchau in the FT in which he examines the ECB's potential moves; and his message;

(...) I see relatively limited room for manoeuvre. The ECB’s official short-term interest rates will probably stay at 4 per cent for a considerable period. The ECB will not start to cut interest rates until inflationary pressures subside, and until there is some hard statistical evidence of an economic downturn. At present, this evidence is confined to sentiment surveys.

In principle I think it is difficult to completely disagree with this call. Clearly, given the fact that inflation is set to remain elevated in the remainder of 2007 and perhaps even beyond a sudden sea-change at the ECB in the form of targeting some kind of arbitrary EUR/USD rate would be equal to complacency and this I think will not happen. However, I do have some qualifiers which are rather important. Firstly, we need to go back for while to the time in the spring of 2006 when Japan ended ZIRP and consequently when the central banks presiding over the G3 currencies (the BOJ, the FED, and the ECB) all 'decided' that now was the time to mop up excess global liquidity. In this way and as should be rather clear at this point in time the BOJ has not exactly been able to follow through on the promises, in the US the FED got and is still sidetracked by a lingering depression in the housing market and only at the ECB have we seen hiking trip which has taken the nominal refi rate to 4.00% in the Eurozone. Secondly, we can of course add the extra spicy ingredient that the US housing market debacle has caused a severe commotion in financial markets and specifically in the very sector (housing) which has been paramount in driving growth in the current cycle both in Europe and in the US. However, and this I think is important the current slowdown of growth in the Eurozone is not caused exclusively by the turmoil in financial markets even if of course it has not exactly helped. Remember then what we talked about in the beginning of 2007 as a triple whammy to the Eurozone economy in the form of higher ECB rates in themselves, a slowing US, and fiscal tightening in key member countries.

So, in looking forward towards tomorrow's meeting we might not want to forget entirely the underlying fundamentals in play here. Yet, one thing is what I perceive to be the fundamentals and another thing entirely is how markets see and play things. In this sense tomorrow's statement from the ECB is ever so important. As such, we must remember that the story of the rise of the EUR/USD in particular as it has been told since Q3 2006 has been one of a persistent play on the closing interest differential between the Fed and the ECB as the latter continued to raise when the former chose to stand firm. This has subsequently driven out the narrative of de-coupling and whether the Eurozone and indeed the global economy could weather a US slowdown or not. Yet, this discourse has also tended to miss the overall point in the sense that while indeed the global economy is changing so that not only the US is doing the heavy pulling the real test of de-coupling would be whether the importers could turn into exporters and vice versa. Specifically in the context of the Eurozone de-coupling has even been narrated implicitly in the context of a process of rebalancing of the global macroeconomic imbalances and whether in fact we were standing before a tectonic shift in which the Dollar tumbled to reflect the large US external balance and where the Euro subsequently ascended to superiority. Of course, I have on several occasions argued why I don't think this will happen but it is a little bit difficult to deny that at this particular point in time this is where we stand.

What to expect tomorrow then?

In this way my main message to investors, analysts and of course the splendid folks at the ECB comes in the form of a question. Do we really believe that the Eurozone can de-couple? This I think is the main nut to crack here and we must remember that in the context of the current environment where the Fed is more likely to go further South than the opposite any kind of uttering of vigilance against inflation (warranted as it may be) will be interpreted as a sign that European policy makers at the ECB believe in de-coupling and that the Eurozone can tolerate tighter monetary policy in an environment where the Fed is lowering. As I have already hinted I think de-coupling is wholly unrealistic given the underlying economic fundamentals but this is nevertheless where we are at the moment.

Moving on to the more mechanical outlook on tomorrow's meeting I would indeed be surprised if inflation is not mentioned, especially since the latest flash estimate from Eurostat suggests that core inflation crept above the ECB target of 2% in August. I don't think that we will see any moves on the rate front and as such I would expect the ECB to issue a statement poiting towards stop-and-go position. In keeping with tradition in relation to regular ECB-speak I don't expect Trichet to utter the word 'vigilance' but much more interesting will be whether the ECB still sees the monetary stance to be accommodative or not? This will go along way to show how the bank views the obvious trade-off at this point between combating inflation and risking to throw the Eurozone and perhaps more specifically key member states (Italy!) into a recession by the beginning of 2008. I am also looking for notable references to the continuing difficulties with the stabilisation of the interbank market where the interest rate still remains rather far above the target at 4% and thus also a linkage between the economic outlook and the ongoing reappraisal of risk in financial markets.

In essence, it is very difficult however to gauge what in fact the ECB is going to focus on tomorrow which only makes it all the more interesting

What I would like to see but won't get? Well, I have only a couple things really. I'd wish that the ECB would consider what is going on in the CEE economies too since many of these countries are pegged both formally and effectively and given the nature of the external balance situation as well as the effect of a rising Euro this situation really is train wreck waiting to happen. Secondly, I would also like to see the ECB putting this into a global perspective of de-coupling and the imbalances instead of looking at those tedious measures of liquidity and inflation. I am not asking for complacency but I am saying that central banks in the current environment are likely to bring in more liquidity by raising rates as well as we need to ask ourselves whether in fact the current upward tendencies of inflation needs to be treated using textbook remedies.

Ok, looking forward to tomorrow I hope and if you want more inspiration here on the brink I can recommend Danske Bank's Niels Henrik Bjørn's preview meeting on the ECB. If his analysis is anything to go by the ECB's statement will be supportive of further continuation of the high EUR/USD.

Spanish September Consumer Confidence Plummets

While it should be obvious to anyone that the most of the national economies in the Eurozone are slowing rapidly, and have been in the Italian and German cases since early summer, this downturn will present some new features. In particular the former "stellar economies" - Spain, Ireland and Greece - may be the worst affected due to their heavy dependence of construction activity for obtaining growth, and due to the dramatic nature of the downturn since mid-August in the property sectors of those countries.

Up to now the data in this regard has been rather anecdotal, like the big drop in cement output in Greece, but today we have a first real data reading (retail sales etc data for the relevant period will still be a little while arriving) in the shape of the Spanish Consumer Confidence Index. Over to Bloomberg:


Consumer confidence in Spain declined to a record low in September after the fallout from the U.S. subprime-mortgage slump pushed up borrowing costs worldwide.

The Official Credit Institute's index of consumer sentiment dropped to 80.2 from 86.5 in August, the institute said today on its Web site. That is the lowest reading in a series that started in 2004.

The cost of inter-bank loans jumped in August after European lenders disclosed losses in the U.S. mortgage market. That pushed up payments for Spanish homeowners who have variable-rate loans tied to the 12-month interbank lending rate for the euro region.

``Spain is heading for a marked slowdown and by mid-2008 we expect it to be growing at decidedly below-trend rates,'' Dominic Bryant, an economist at BNP Paribas SA in London, said in an e-mailed note.

The 12-month Euribor rate jumped to 72 basis points above the European Central Bank's benchmark interest rate this month, twice the average spread since the debut of the euro. In Spain, 95 percent of home loans have variable interest rates.


Here's the chart:




and here's the chart for the sub-components:




What can be seen from this chart is that all the components reached a peak this summer in April and May, in June and July they were all down, but only to the level of February/March, then from July onwards the whole thing starts to subside, and who knows if we have touched bottom yet, since all the forward indicators are a bit more positive, but my feeling is that that is rather an indication of the fact that people still don't appreciate the gravity of what is happening. It hasn't sunk in yet, and people are still expecting the housing market to pick up in a quite unexpected fashion. Spain could face a hard landing. If things continue to move at this speed it will get one.

Also service activity in Spain, which accounts for some 60 percent of the economy, posted its slowest expansion in almost two years in September, according to a separate survey of executives by NTC economics. The index fell to 52.4 from 53.5 in August.



A similar picture can be seen in the manufacturing PMI, although manufacturing accounts for a much smaller part of total economic activity in Spain than in some other European economies.



In the case of manufacturing, the rate of expansion has been slowing since June, although some reduction of activity is normal in the summer. It is the September reading which should give cause for concern here.

At the present time we are simply talking about a slowdown in the rate of expansion, but how far is this now away from an actual contraction. Not very, I would say.

Italian and German Services Slow Markedly in September

European service industries grew at the weakest pace in two years in September after a jump in credit costs hurt banks.Royal Bank of Scotland Group Plc said today its services index fell to 54.2, the lowest since August 2005, from 58 in August. The index is based on a survey of purchasing managers by NTC Economics Ltd. and a reading above 50 indicates expansion. The figure is above a Sept. 21 estimate of 54.

Italian services hit a level of 53.9:



But perhaps most shocking of all is the decrease in the rate of expansion in German services, which dropped from a level of 59.8 in August to one of 53.1 in September.

Building Activity in Greece

I'm trying to get a measure on the extent of the construction slowdown in Greece and its likely impact on the general level of economic activity in Greece. Building permits conceded give one indication. The latest data we have is from June. Looking at the chart, the slowdown from the middle of last year is clear enough.




The year on year growth graph also says it all I think.





We don't have too many other measures for Greece at this point, but the Greek Statistical Office do use cement output as a proxy for the level of construction, and a glass at the volumes used does tell its own story.




Even though in June and July there was a recovery from the lower level of earlier in the year (when remember the government deficit reduction was affecting civil engineering projects and the interest rate tightening at the ECB new home starts), the level is way down across the board from a year earlier, as can be seen clearly from the year on year chart.




And remember all of this is pre the sub-prime turbulence in August, since the latest month we have any kind of data here for in July.

Tuesday, October 02, 2007

Where is He? The Mysterious Dissapearance of Jean Claude Trichet

Well this is a rather frivolous post about a fairly serious issue. Has anyone seen Trichet? (No, not Kelly, Trichet). I imagine the financial markets would like to know what he thinks. Or rather, maybe they wouldn't, but they need to.

Basically this isn't a case of quietly fiddling while Rome burns (and this) but it damn nearly is (burning I mean, or was that Paris), and the Reichstags won't be far behind. Meantime hardly a flat or house is being sold in Spain.

So with all eyes focused on US data while the eurozone economy is visibly tanking, or rather wilting by the day, where the hell is Trichet? Hasn't anyone else noticed how he has suddenly gone missing? Strong vigilence is obviously over, but when the hell is he going to start explaining that he might have to lower interest rates, and when he finally does this how will the financial market activists respond? I mean some of them seem to have very little idea about what is actually going on at the moment. Over at DailyFx, for example, they seem to be under the impression that the eurozone is a country or something:

"As an export dependent nation, the Eurozone has a lot to lose if the Euro continues to rise."


I think they meant Germany there, since France certainly isn't dependent on exports, and Spain has a whopping trade and CA deficit which puts the US one really in the shade.

Actually the general tone of what the DailyFx analyst has to say isn't so far from the mark:

The Euro made a new record high today despite larger than expected drops in German business confidence and import prices. Economic data out of Europe continues to get worse and if the Euro does not stop rising, the European Central Bank will be forced to verbally intervene in the currency. Don’t forget that the Euro topped out in late 2004 after Trichet called the moves brutal and he may have to do so again as German business fell to a 19 month low in September. This is a result of deteriorating credit conditions, a strengthening currency and tight monetary policy. As an export dependent nation, the Eurozone has a lot to lose if the Euro continues to rise. The only major benefit of a strengthening currency is lower inflationary pressures. We are already seeing the initial impact with import prices falling for the first time in nearly 2.5 years. Less inflationary pressure means less pressure on the ECB to raise interest rates. If we see a material slowdown in economic data, softer inflation may actually give the central bank the flexibility it needs to begin talking about lowering interest rates.


So this is the point. We are soon going to be into declining rates at the ECB, and then what is going to happen to euro/dollar. I ask you? Are the markets ready for this?

Even ECB-adviser and hawk Joaquim Fels now has the current ECB rate as neutral, and of course, if the fundamentals are deteriorating, neutral quickly becomes "overtight". No wonder Trichet is hard to find at the moment.

If you are looking for more serious analysis of all this, Claus Vistesen has some over at Alpha Sources.

As for Trichet, after a long search I have finally located him, he has been in Holland, talking about the importance of demography for Europe's future. Obviously he is rather more focused on the longer term right now. I can well understand why.

German Retail Sales Continue To Fall

The data for August retail sales for Germany were released by the Federal Statistics Office at the end of last week:

WIESBADEN – According to provisional results of the Federal Statistical Office, turnover in retail trade in Germanyin August 2007 was in nominal terms 1.2% and in real terms 2.2% smaller than that of the corresponding month of the previous year. The number of days open for sale was 27 in August 2007 and 27 in August 2006, too.

When adjusted for calendar and seasonal variations (CENSUS-X-12-ARIMA), the August turnover was in nominal terms 1.1% and in real terms 1.4% smaller than that of the preceding month.

Compared with the corresponding period of the previous year, retail turnover was in the first eight months 2007 in nominal terms 0.9% and in real terms 1.6% smaller than that in the first eight months of 2006.


Here's a chart of the monthly index since January 2006:



And here are the monthly year on year changes.



Incidentally, I really don't see how anyone could have been so silly as to argue that a 3% increase in the VAT consumption tax would have no impact on domestic demand, the effect is evident even to the naked eye, isn't it?