Monday, July 28, 2014

Something Is Off In Europe (excerpt)

The UK remains one of the few advanced economies that is advancing at a solid pace. During Q2, real GDP rose 3.1% y/y, the best since Q4-2007. The same can’t be said for the Eurozone. The region’s July flash PMIs look solid. The composite output index, which was 54.0 this month, has been hovering around that level since February. It has been looking good since last summer, yet the “hard” data, such as industrial production and retail sales, have been quite soft. (Click to add Markit PMIs to MyPage.)

Weighing on the Eurozone is that bank loans continue to fall in the region. They declined by €243 billion at an annual rate over the three-month period through June. While the ECB has been providing easy monetary policy, bank regulators (including the ones at the ECB) continue to subject the banks to stress tests that discourage risky lending.

Even Germany, the Eurozone’s strongest economy, is showing the negative effects of tough lending standards, particularly on its large trading partners in the region. The strong euro is another headwind. The uncertainty caused by the Ukrainian crisis, with the potential for shortages and higher prices of natural gas this coming winter, is also weighing on the Eurozone. No wonder that Germany’s Ifo business confidence index fell from a recent peak of 111.3 during February to 108.0 in July. Both its present and expectations components fell sharply this month.

Today's Morning Briefing: Mixed Signals. (1) Bond yields at historic lows, as credit spreads start widening. (2) LargeCaps up, while SmallCaps down. (3) Q2 GDP estimates weaken, as earnings improve. (4) PMIs in Eurozone and China overstating economic growth. (5) Easy monetary policy is coming and going. (6) US labor market improving, yet there’s still slack. (7) ECB is easy on monetary policy, but tough on banks. (8) Strongest economy in Eurozone is weakening. (9) China’s excess capacity is producing more. (10) Japan losing its growth and inflation mojo. (11) “Lucy” (+). (More for subscribers.)

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