Thursday, January 3, 2013


I no longer start my mornings by looking for the latest 10-year yield on Spanish government bonds. It dropped from a high of 7.61% on July 24 last year to 4.99% this morning. Even the 10-year Greek government yield has plunged from a high of 43.92% last year to 11.14% this morning.

These extraordinary declines weren't triggered by any improvement in the sorry state of state finances in the euro zone. Rather, they started when ECB President Mario Draghi declared in late July of last year that he would do “whatever it takes” to defend the euro, including buying the sovereign notes of euro zone governments. So far, the ECB hasn’t had to do much to back up Draghi’s declaration. His willingness to implement unlimited “outright monetary transactions” (OMT) has worked wonders.

Draghi’s fairy dust also stopped the massive capital outflows out of Spain and Italy into Germany, as evidenced by the flattening of TARGET2 balances since last summer. Among the best-performing stock markets last year were the ones in the euro zone: Greece (33.4%), Germany (29.2), Ireland (17.1), and France (15.2).

So far, the rally in European stock prices hasn’t been validated by the region’s economic indicators with a couple of important exceptions. As Debbie discusses below, the euro zone’s manufacturing PMI index was 46.1 during December, little changed from November and well below 50. On the other hand, the M-PMI for the UK jumped to 51.4 last month from 49.2 during November and 47.9 in October. In addition, Germany’s Ifo business confidence index rebounded from 100.0 during October to 102.4 during December.

Today's Morning Briefing: Live to Die Another Day? (1) The Person of the Years 2008-2012. (2) Don’t fight the Feds. (3) Policymakers’ mantra: “Whatever it takes.” (4) Markets are driven by headlines, driven by Big Governments. (5) Bond yields dive in Europe. (6) Draghi’s fairy dust. (7) China’s new leaders promoting same old policy of more urbanization. (8) Japan’s new prime minister wants more fiscal spending and more monetary easing. (9) Another fiscal fist fight coming. (10) The winner will be Big Government. (More for subscribers.)

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