Weldon's Money Monitor
Following last week's much-weaker-than-expected confidence survey from the German IFO we noted comments from IFO Chief Economist Gernot Nerb, who stated quite simply ...
... " I think there is no reason for the European Central Bank to raise interest rates."
Today, following this morning's release of the NTC-PMI Survey results for April, sentiment is intensifying rapidly, as we note comments from NTC Chief economist Chris Williamson ...
... "What we are seeing now is a downward trend becoming increasingly entrenched in the euro area. It is too early to say we are in a recession, but we are in a situation where the chances of a recession have increased. We are moving into rate cut territory."
Indeed, note these dynamics as apply to this morning's data:
• French Business Confidence hit an 18-month low
• German and Belgian Confidence hit a 19-month low
• Eurozone Confidence lowest since Sept-2003
• Headline indexes now CONTRACTING, posting sub-50 readings across the board.
• Input prices hit a 15-month low
• Employment Indexes hit new lows, with the Eurozone reading posting its 47th consecutive sub-50 reading.
• Netherlands Employment at 16-month low
• German Employment at a 17-month low
• Spanish Employment at a 22-month low
And, for the icing on the cake, we note ...
• Backlogs posted largest decline since June 2003
In other words, final demand is faltering, causing a decline in new orders, and a plunge in backlogs, causing inventories to rise, leading to LESS price pressure amid a complete lack of pricing power, driving companies to cut employment more aggressively in order to TRY and stay 'competitive'.
Grabbing our trusty data-scalpel, we begin to carve the texts of the individual country reports, starting with Germany, where the issue of competitiveness is front-and-center. Core Europe is facing a domestic demand slowdown, AND increased export competition from both Asia, and Eastern Europe. Thus ...
... "In line with ongoing cost minimisation initiatives and weaker domestic market conditions, German manufacturers reduced employment at their units for the seventh consecutive month in April. Moreover, the rate of contraction in workforce levels was consistent with January's fourteen month high.
... Employment fell across the consumer, intermediate, and investment goods sectors during April."
... "Strong competition, especially from Asian and Eastern European producers, led German manufacturers to reduce their average charges for the first time in over a year."
In Italy, we note the index readings for:
• Output Prices ... 48.9 ... sliding into sub-50 'deflationary' territory from March's reading of 50.8, and the first reading below 50 in fifteen months.
• Backlog of Orders ... 43.8 ... down from the already LOWLY reading of 44.0 posted in March, and the LOWEST level in TWO YEARS.
Note some of the text from Italy ...
... "a more marked decrease in new export orders, with fewer new orders from the U.S. reported in a number of cases."
... "competition from foreign manufacturers had a negative impact on their new export sales."
... A number of manufacturers reported improved efficiency."
... "Panelists indicate that lower levels of new orders had prompted the reduction in staffing.
... "Employment levels showed a sixteenth consecutive month of decline in April."
Pretty straight-forward really ... less domestic demand, increased export competition, improved technological efficiency ... equals ... a deflationary labor market dynamic, feeding thru to LESS income, causing more downward pressure on domestic demand, and crushing pricing power.
And what ????
The ECB is supposed to HIKE short-term interest rates ... too ???
Har Har Hardy Har Har !!!!
The icing on the cake comes from the third core member, France, where both the headline PMI Index and the Output Index hit their lowest levels since Sept-03 and July-03 respectively. Moreover, France posted the largest month-month declines in numerous indexes. For example:
• PMI Index ... 49.8 ... down more than two full points from March's reading of 51.9.
• Output ... 49.9 ... down almost three full points from 52.8
• New Orders ... 48.6 ... plunging three full points from 51.6
• Quantity of Purchases ... 47.3 ... collapsing by more than four full points, from 51.6
The French PMI text is quite straight-forward as well ...
... ""Weaker demand, stronger global competition, and lower client activity were all reported as factors in April to have resulted in a net decline of new orders. The fall was the first contraction of incoming new work in twenty-one months, and was mainly driven by weakness in the domestic economy."
DRIVEN BY WEAKNESS IN DOMESTIC DEMAND !!!
And there is more ...
... "As levels of incoming new work fell at a sharper rate than output, a third successive monthly rise in stocks of finished goods was signalled. April's rise in post-production goods was the strongest increase in the survey history."
The LARGEST increase in finished goods INVENTORIES in the HISTORY of the French PMI Survey ... speaks volumes on its own.
Need we say more ???
Of course, we must ... as we turn to the peripheral and emerging European economies, one-time growth juggernauts that have 'suddenly' turned cold. Note these data-tid-bits:
• Czech New Export Order Index ... 50.2 ... teetering, and down BIG from the March reading of 54.0.
• Dutch Employment Index ... 43.1 ... a sixteen month low and down sharply from March's already low reading of 46.2.
• Dutch Output Price Index ... 49.1 ... dumping below 50, plummeting from 53.5 in March.
• Spanish Orders Pending Index ... 45.0 ... down more than three full points from the already sub-50 March level of 48.3.
• Spanish Employment Index ... 47.2 ... plunging into sub-50 contraction-territory, down from 50.1 in March.
• Swedish Employment Index ... 50.1 ... teetering on contraction, and having PLUNGED from 55.1 posted in March.
In other words, the economic erosion in Europe is BROAD-BASED, and INTENSIFYING at an ACCELRATING pace.
Thus, we throw the spotlight on the markets, amid the realization that the odds of an ECB rate hike are dwindling. First we note the end-year Dec-05 Euribor 3-Month Deposit contract, shown below in point-and-figure format, a long-time Money Monitor favorite 'charting methodology'. In this case, the Dec-05 contract has built a support base below 97.80, and is attempting to move higher.
We look next for the completion of the topping pattern exhibited in the chart below, in which we plot the Dec05-Dec06 yield swap. A move below +40 basis points would indicate intensified belief that the ECB will NOT be aggressively hiking rates in the next 18 months. BUT, this spread, still, DOES price ECB rate hikes, of nearly 50 bp.
Further along the curve we note the yield action basis the 2-Year Shatz, seen in the longer-term daily chart on display below. The technical action speaks for itself, with a false breakout in yield (bear price trap predicated upon higher inflation and a tighter ECB ... leading to a fresh breakdown in yield, below the 4Q-04 low, and thus voiding the uptrend in place since the 1Q of 2003. Note also the directional downturn AND breakdown in the MA.
Indeed, the short-end is merely 'following' the more pronounced decline in yields at the longer end, as defined in the chart below plotting the 10-year Eurobund yield, weekly. Indeed, this yield is now spending its third week below 3.59%, and a close here would mark the first three-week long foray below the key 2003 low yield, clearly indicating a technical breakdown.
VOILA ... the 10-Year/3-Month Yield Curve is also breaking down, as noted in the long-term weekly chart on display below. In fact, the 1Q curve steepening could not even breach the now-down-trending long-term MA.
MMmmmm, lower yields, curve flattening, eroding eco-dynamic ... says what for the Eurocurrency ???
Note the potential answer as depicted in the longer-term daily chart of the EUR-USD, seen below ... revealing a serious and imminent threat to the multi-year trend towards EUR appreciation.
Indeed, we conclude with an interesting perspective on all this, in the context of thoughts that the pressure on the ECB to CUT rates could well intensify from here, parallel to a 'release' in the currency 'valve' amid increased export competitiveness and downward price pressure.
We note the potential for an upside breakout in gold, 'priced-in' Eurocurrency, as seen in the long-term monthly chart on display below. A move above EUR 349 per ounce would likely come in conjunction with a decline in the EUR ...
... and/or ...
... a shift in rhetoric, and eventually policy, towards an EASIER monetary stance, and away from the current belief dominant in the Euribor swaps, implying numerous ECB rate hikes in the next 18 months.
Bottom Line, from the strategy perspective, we are close to bearishly pouncing all over the EUR, and a move below the April-14 intra-day low of 1.2765 would provide the technical catalyst.
In the meantime, Friday's slew of economic data from the U.S. does NOTHING to change our stance elsewhere, and in fact, ONLY ENHANCES our resolve, from the macro-side, as price pressure and softening domestic U.S. demand were in ABUNDANT evidence.
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