Tuesday, October 28, 2014

Eurozone Remains Challenged (excerpt)

In a 10/10 statement, ECB President Mario Draghi noted that the results of a stress test of the Eurozone banks would be released on October 26. This “year-long exercise” has strengthened their capital base, in his opinion. In my opinion, it also explains why banks haven’t been lending. However, Draghi hoped that the banks will finally be in a position to transmit the ECB’s easy monetary policies (including TLTRO and ABS purchases) by lending more soon.

The results are in, as noted in the 10/26 NYT: “The bulk of Europe’s biggest banks would be able to survive a financial crisis or severe economic downturn, the European Central Bank said on Sunday, concluding a yearlong audit of eurozone lenders that is potentially a turning point for the region’s battered economy.” Only 13 of 130 big banks failed the test. The hope is that the others will find it easier to raise money that they can lend out.

For now, the Eurozone’s economy remains challenged. Consider the following:

(1) Business surveys. It was mildly encouraging to see the uptick in the Eurozone’s flash M-PMI during October to 50.7 from 50.3 the month before. It was led by Germany’s flash M-PMI, which rose from 49.9 (the first reading below 50.0 since June 2013) to 51.8. However, France’s M-PMI fell to 47.3 from 48.8. That was the sixth consecutive month below 50.0 for France.

The bad news is that Germany’s M-PMI is highly correlated with the country’s Ifo business expectations diffusion index, which fell below zero during September for the first time since January 2013. The overall Ifo business confidence index dropped to a 22-month low of 103.2 during October from this year’s April peak of 111.2.

(2) Money and credit. While the Eurozone’s M2 growth rate has picked up lately, loans to the private sector continue to fall. During September, M2 rose 3.0% y/y, up from the year’s low of 2.0% during April. However, loans are down 1.7% y/y.

Deflationary pressures are mounting in the Eurozone, with the CPI up just 0.3% y/y during September. The Markit news release on the Eurozone’s composite PMI noted: “Prices were increasingly being cut in order to help boost sales. Average prices charged for goods and services showed the largest monthly fall since February 2010, having now fallen almost continually for just over two-and-a-half years.” Critics of the ECB’s bank stress test complain that it did not stress the risk of deflation.

Today's Morning Briefing: Earnings Swooning. (1) Upside hook missing for Q3 earnings. (2) Oil is weighing more on earnings than the dollar. (3) Energy’s NERI drops sharply this month. (4) Big cuts in S&P 500’s Q4 and 2015 estimates last week. (5) Forward earnings losing some mojo. (6) Will ECB bank stress test results lead to more lending, or more stress? (7) Two Eurozone skeptics. (8) Italy’s economic suicide movement. (9) Germany’s Ifo vs. M-PMI. (10) Corruption is officially forbidden in China. (11) Power to the People, or the Party? (More for subscribers.)

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