So much news, so little time. A list of items crossing my screen over the last two days, in no particular order:
Greece referendum off, at least for today. Greece Prime Minister George Papandreou backtracked on his calls for referendum, much to the relief of market participants. I hesitate to think this story is over. The citizens of Greece might not react calmly to having democracy snatched back out of hand's reach. It is never easy to put the genie back inside the bottle.
The ECB cuts rates. Better late than never, I suppose. The surprise rate cut by the ECB is also credited with bolstering markets today. Given the worsening economic situation, we should expect more sooner than later. And note that with the benchmark rate at only 1.25%, the zero bound is clearly in sight. How do you say liquidity trap in German?
Red flags in the German data. Germany, the juggernaught of the European economy, looks to be under stress. The German Purchasing Managers Index crossed over into contrationary territory last month for the first time in two years, while German unemployment rose for the first time in two years. From Bloomberg:
“It’s too early to call this a trend change in the labor market, but it shows that growth forces are weakening,” Lothar Hessler, an economist at HSBC Trinkaus & Burkhardt AG (TUB) in Dusseldorf, said in an interview. “The dynamism of the economic upswing is lessening more than thought.”
I am more willing to call a shift in Germany's labor market - the austerity that Germany is fond of foisting on the rest of Europe is coming home to roost.
Italian economy also shifted into low gear. The Italian PMI dropped a whopping 5 points to 43.3, a notch below Spain's 43.9. No wonder Italy's Prime Minister Silvio Berlusconi is having trouble pushing through another austerity package. Rebecca Wilder highlights the importance of growing political risk in Italy:
Another driver of the increasing Italian risk premium is political risk. You can see this in the spread between Italian 10yr bond yields and the Spanish 10yr bond yields, which has collapsed since the summer and is now trading at -70 bps. That means the Spanish sovereign is borrowing at a 10yr yield that is 70 bps cheap to Italy, where it used to pay a premium. Something idiosyncratic is going on with Italy.
It is tough to see how a Europe still struggling to put a ring around Greece can find the time and resolve to get a ring around Italy as well.
More on Europe. Is this the tip of the iceberg? Ambercrombie does complete reversal on the European outlook:
The retailer was hurt by a “slowing trend” in the region, while same-store sales in Japan and Canada continued to decline, according to a statement today. The shares slumped 21 percent to $58.50 at 10:53 a.m. in New York after dropping as much as 23 percent for the biggest intraday loss since Nov. 30, 2000.
Abercrombie & Fitch surprised investors after Chief Executive Officer Michael Jeffries said in August that there was a “strong momentum” in Europe. The retailer is joining a growing list of consumer companies, from Whirlpool Corp. to Kimberly-Clark Corp., that saw a slowdown in the region mired by a sovereign debt crisis.
The US service sector comes in on the soft side. The ISM nonmanufacturing headline number was down slightly, with mixed internals. Production came in down 3.3 points, while new orders dropped 4.1 points. Both measures held above 50. On the postive side, the employment component rebounded, offering some hope for tomorrow's employment situation report. In related new, initial unemployment claims edged below 400k. Overall, Calculated Risk is not impressed, expecting another weak report.
The Fed hold steady. Mark Thoma has the story here. Inexplicably, monetary policymakers slashed forecasts, claimed dissapointment at the state of the economy, and yet choose to take no policy action. The path to additional action is blocked by the lack of clear indications of deflation risks. The economy is bad, just not bad enough.
Another financial casaulty of the European crisis? First was Dexia, next was MF Global. Is Jefferies Group the third to fall? That was concern today as investors took the stock down 20% before it rebounded. More disconcerting is the message the price actions sends about the vulverability of US financial markets to European contagion:
“It is a testament to the fragile nature of the markets that the collapse of MF Global, following a monumental display of bad judgment by that company’s management, should generate contagion,” said Chris Kotowski, an Oppenheimer & Co. analyst in New York. Jefferies is “a very conservatively run firm where management has enormous ‘skin in the game.’”
Bottom Line: This is starting to feel like 2007 all over again. Then, like now, equity markets discounted the smoldering financial crisis, sending stocks higher through much of that year. I continue to think Europe is much further from a solution than American observers appear to believe, and that as the global situation deteriorates further, so too will the US economy. But we have yet to see that story fully emerge in the US data, and thus I understand the hope that the US is able to squeak through this episode with only limited bruising.
