Another week of downbeat data suggesting deadbeat prospects for many, the drum-roll of potential sovereign default as always in the background, making some suddenly aware of the fragility of the current situation. Friday’s eagerly awaited US May employment figures saw non-farm payrolls increase by ONLY 54,000, and manufacturing lost 5,000 jobs taking unemployment up to 9.1%; Hourly Earnings are running up just 1.8% y/y, 50% the pre-2008 ‘recession’ level. The news pushed yields on top-rated Treasuries down even further taking some to their lowest since early December, 10-year Bunds and Treasury notes under the psychological 3.00%; the spread of Portuguese debt over these widened to a new record 709 bps to yield 10.00%. Red and green money market futures contracts rallied by 3 to 12 bps inching closer to record highs. The CHF/USD hit its strongest ever at 0.8336, the EUR/USD manage to get up to $1.4560, the rest were ‘mixed’. Stock indices dropped again this week, Amsterdam and Argentina to the lowest this year, Australia’s ASX not far behind.
Commercial and residential property continues to be a drag in many regions. The UK’s Hometrack Survey saw prices slipping by 3.7% in the year to May and mortgage lending is bumping along the bottom around £800m – where it has been since August 2008, and this despite house builders subsidising 30,000 first-time buyers in shared equity schemes, a total £835m over the same 3 year period. In Japan April Overall Household Spending shrank by 3.0% y/y as workers took a 1.4% pay cut and overtime dropped by 3.4%; housing starts are running at 798,000 annualised, 50% of the 1990 and 1996 peaks. In the US the S&P/CaseShiller index showed an overall 3.61% March y/y decline for house prices in the 20 biggest metropolitan areas; these are now back at 2002’s levels and 33.0% below 2006’s peak. Regional disparities are alarming, prices in ravaged Detroit below 2000’s levels, Miami, Las Vegas and Phoenix –50.0% from bubble highs. Interestingly only the Washington D.C. area is holding up – no doubt due to government spending!
Economists and commentators are discussing ‘post financial crisis monetary and fiscal policy’ – what they don’t seem to realise is that the crisis is not over at all, in fact it’s about to get worse. Bank of Italy governor Mario Draghi gave his last annual speech saying, ‘the intertwined vested interests oppressing the country in so many ways must be eliminated’, something he has been unable to sort over the last 6 years at the bank as well as being on the boards of the ECB, IBRD, ADB and BIS. He will replace retiring ECB governor Trichet in November as the former ‘bows out’ having raised rates by 25 bps recently (to say things have normalised?) and on presentation of the Charlemagne prize for EU unification calling for a pan-Eurozone finance ministry with the power to veto spending plans of national Treasurers. Angela Merkel’s spokesman retorted that it ‘is a very long-term project and certainly not the subject of government considerations in this phase’. The merry-go-round continues. In the UK the Care Quality Commission was created in 2008, to replace the previous failing regulator. It now blames the 300 job vacancies it currently has for findings that 1 in 7 private sector care homes for the elderly are rated ‘poor’ or ‘adequate’ at best, a higher proportion than in the public or charitable sectors. The biggest of these is teetering on the edge of bankruptcy threatening to chuck 30,000 onto the streets and exposing the weaknesses of project finance.
Central bank meetings will be back in focus this week with both the ECB and BoE set to announce their policy stances. No changes are likely, but we expect to hear the ECB’s Trichet use the term “strong vigilance” at next Thursday’s press conference. This should be taken as a signal that the ECB are ‘preparing’ to raise rates at the July meeting, despite ongoing worries about peripheral debt sustainability. Indeed, given the ongoing firm tone to many of the core countries’ macro data, plus the fact that inflation is likely to push close to 3.0% in the summer months, we look for a further 25 bps rate hike in October. Meanwhile, Eurozone governments will continue discussing Greece. The next official ministers' meeting is June 20th but preparatory meetings are currently taking place. While the German government seems to have given up the idea of voluntary debt restructuring, the conditions for any additional loan to Greece must still be discussed. In Portugal, opinion polls for Sunday’s elections are still ‘suggesting’ only a limited lead of PSD over PS, and we suspect a coalition government is the most likely final outcome. In Germany, we will get the entire batch of industrial data for April. Japanese events should have had a rather limited impact, but IP and new orders should still be subdued. Moreover, after their strong performance in March, exports are set to normalise somewhat.
The US data flow has been fairly disappointing recently, with ISM and ADP releases adding to worries about the strength of the recovery and payrolls did NOT lift the mood. The BoE’s meeting is expected to keep UK rates ‘on hold’, but will likely see a change of vote now that ultra hawk, Andrew Sentance, has left the MPC. We suspect that his replacement, Ben Broadbent, is unlikely to go in immediately voting for a rate hike. Instead we suspect he will vote with the majority in his first few meetings. The central bank meeting in Brazil looks like it will be unusually uneventful. Central bank president Tombini has repeatedly asserted the bank’s intention to extend the tightening cycle for a “prolonged” period. Having slowed down the pace of rate hikes to 25 bps at the last meeting, officials will inevitably consider only a 25 bps rate increase; to 12.25%. Elsewhere, policy meetings in Australia and New Zealand should also be uneventful, but with strong domestic demand, high commodity prices and unprecedented business investment in the pipeline the RBA’s next tightening move is not far off. The RBNZ is likely to keep in place emergency stimulus, after New Zealand’s devastating earthquake.
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