Euro zone perspective – nowhere near out of the woods
After the Easter break, a bit of perspective — to paraphrase the immortal Spinal Tap, maybe too much perspective.
Over the past two weeks, Spanish and Italian borrowing costs have continued to rise – in the former’s case they have now relinquished more than half their fall since December and are heading back into the danger zone. Stocks have also appeared to have given up on their first quarter rally, presumably testament to the realization that the ECB and other top central banks are unlikely to be writing any more blank cheques for banks to reinvest.
Late last year, it was Italy that seemed to have the power to drag Spain into the debt crisis mire. Now, it’s the other way round and after the ECB anaesthesia wears off, it’s clear the euro zone patient is still sickly.
The European Commission will cast an eye over Spanish budget plans at some point this week. Spanish risk premiums have leapt since Prime Minister Mariano Rajoy defied Europe in early March by unilaterally easing Madrid’s 2012 deficit target. The silver lining for Madrid is that it has taken advantage of the benign market conditions early in the year to clear almost half its 2012 debt issuance needs and Rajoy is pushing through sweeping labour reforms and savage spending cuts. The trouble is that policy mix is likely to drive Spain further into recession – a recipe for debt to rise not fall.
Approaching elections in Greece and France throw further uncertainty into the mix. The former could weaken austerity resolve and the latter may elect a socialist president intent on rewriting the bloc’s new fiscal rules.
After weak U.S. jobs data on Friday, even a surprise Chinese trade surplus in March – suggesting it’s fabled soft landing is on track – has failed to lift equities. European stocks have dropped more than one percent in early post-holiday trade and safe haven German Bunds have jumped at the open with yields at their lowest level since September. For the first time this year, the markets have reverted to a glass half empty rather than half full bent.
The U.S. data overhang continues to be the strongest driver for now but a wobbly Spanish bond auction last week is also fresh in investors’ memories, given a big Italian debt sale looms on Thursday.
Revving down
It used to be the low-end stuff like shoes, clothes and furniture that displaced American manufacturing, then cars and consumer electronics. A new report by Alan Tonelson, a researcher at the U.S. Business and Industry Council which represents 1,500 American companies, now shows that high-end U.S. industry is facing ever tougher foreign competition in its own backyard.
Tonelson has crunched the numbers since 1997 on high-value, advanced manufacturing – the crown jewel of American industry that is capital intensive and depends on technological superiority such as turbines, pharmaceuticals and electrical engineering. He finds that imported products had captured 38 percent of the $1.63 trillion U.S. market for advanced manufactured products by 2010, up from 24.5 percent when the government started collected the data in 1997. Only six U.S.-based advanced manufacturers have gained market share in the United States in the 13-year period. Sectors that are more than 50 percent dominated by foreign producers have risen from eight in 1997 to 32 by 2010, he said.
The high-value core of America’s domestic manufacturing sector is suffering chronic and significant weaknesses. They strongly indicate that advanced U.S.-based manufacturing industries as a whole are failing a basic test of competitiveness – thriving in a market that is not only the world’s largest single market for such goods, but the market that they should know far better than their overseas counterparts.
Industries that have lost their U.S.-market dominance include metal-cutting machine tools, broadcast and wireless communication equipment, mining equipment, heavy-duty trucks and chassis, turbines and turbines generator sets – to name a few. None of the data are consistent with a smartly recovering, healthy domestic manufacturing sector, he said.
Interestingly, it has occurred even though the U.S. dollar on a trade weighted basis has declined in value by 10 percent over that time, making imports more expensive. His report throws a different light on 2010 as a banner trade year for the United States when exports increased by $85.6 billion, and on U.S. manufacturers adding jobs last year at the fastest pace since 1997. It’s the kind of data that has trade and industry groups in Washington talking of the U.S. needing an industrial policy. Remember Rolls Royce and Great Britain’s manufacturing slide?
Tonelson reviewed 108 industry sectors in 2010 against 114 in his 1997-2004 study. The differences were due to some changes in government data collection, U.S.-import tariffs, on iron and steel, tires and the degree of detail available. Although some significant sectors were excluded as a result, Tonelson said it reflects general trends on import penetration to the U.S. market.
Sharply narrower trade gap revives hopes for decent Q3 growth
Economists busy revising down their third quarter gross domestic product forecasts had to backpedal a bit on Thursday after Commerce Department data showed a steep shrinking of the U.S. trade deficit — despite an unexpected rise in weekly jobless claims. The trade gap shrank to $44.8 billion in July, Commerce Department data showed, down sharply from June’s $53.1 billion deficit and much lower than forecasts around $51 billion. The 13.1 percent decline was the biggest month-to-month percentage drop in the deficit since February 2009.
Argues Pierre Ellis, senior economist at Decision Economics:
The trade numbers are probably sufficiently better than expected to cause some upward revision in the GDP forecast. We’re seeing very strong growth in exports, offsetting some weakness last month, and the strength was in the right place, capital goods, without being centered in aircraft. There’s solid foreign demand for U.S. capital goods exports, so that’s a hopeful sign for the outlook. There’s enough strength abroad going into this apparent slowdown to keep the momentum going.
Or Am Ginzburg, head of capital markets at First New York:
The trade balance was better than expected, and despite worse jobless claims, that could move up GDP estimates and that is why we probably didn’t go down more than what we should have on the number. It was telling you there was no indication of the Hurricane Irene effect.
Argentina set for wheat windfall
Not everyone is upset about the 50 percent surge in wheat prices over the past month.
Wheat’s rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world’s top seven wheat exporters, may be set for a windfall.
Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.
Investors are taking note.
RBC analysts are advising their clients to buy the Argentine peso against the dollar. The peso is trading at 3.933 at present but currency forwards markets are pricing in a 2.1 percent fall in the peso’s value over the next three months. RBC reckons they could be wrong and sees “very strong grain commodity prices supporting higher FX export inflows.” That it hopes, will keep the peso stable to the dollar. Buying the peso now would mean a 2.1 percent gain over 3 months or almost 9 percent in annual terms.
Nick Chamie, strategist at RBC, now expects Argentina’s economy to grow 6.5 percent this year — more than the 5 percent he originally predicted. He points out the stronger wheat price has had a knock-on effect on other grains – prices for soy and corn, of which Argentina is a top exporter, are up 11-13 percent over past month.
Arentina has a bad reputation with investors — it defaulted on $100 billion in debt in 2002, a record for any sovereign. It only recently finished restructuring defaulted debt and is hoping to come back to bond markets soon. The grain price bonanza could make its job easier. Strong grain export revenues have already boosted central bank coffers to a record $51 billion.
Germany’s economic policy gamble
At first glance, Germany appears to be feeling the global economic downturn harder than many of its European peers: Industrial output fell by nearly a quarter on the year in February — taking a bigger hit than Britain, France and even Italy — and economists expect the economy to contract by as much as 7 percent this year.
Yet two government policy measures are helping insulate ‘Otto Normalverbraucher’ (Joe Public) from the full impact of the downturn: ‘Kurzarbeit’, or short-term work, and the ‘Abwrackpraemie’ — a ‘cash-for clunkers’ car subsidy plan.
By taking advantage of legislation that promotes shortened hours, many German firms have avoided lay-offs, helping limit a rise in the unemployment rate, which now stands at 8.1 percent. And the car subsidy has given a boost to the auto sector, to which close to one in five jobs are linked in Germany.
Both are short-term measures that can only stave off the worst of the economic downturn for so long — employers can use the shortened-hours facility for up to 18 months and the car subsidy will expire by the end of 2009. But the measures represent a policy gamble that might just pay off for Germany: just as they fade out, global demand could start to take off — a scenario that is shaping up well. The VDMA engineering sector association says Germany’s plant and equipment industry is seeing early signs of stabilisation, and Bundesbank President Axel Weber expects the economy to make a gradual recovery next year.
“So far it looks like everything is running according to plan,” said DekaBank economist Sebastian Wanke. Yet there was a risk global demand would not take off in time, he added.
“The question is will the global economy stabilise again and help us, via our exports. Or will it remain subdued, meaning we’ll see a sustained weak phase? In which case, at some point these measures won’t work any more… It’s a tightrope walk, without an alternative.”
from Global News Journal:
China, and the slowdown showdown
America caught a cold and now China has one too.
IMF chief Dominique Strauss-Kahn said on Monday that the Fund could cut its forecast for China's economic growth in 2009 to around 5 percent. To think that only last year China was galloping at a double-digit clip. It's staggering, and it's worrying.
Worrying, for one thing, because - as the Heritage Foundation's Derek Scissors puts it - "the American economic slump is running into the Chinese economic slump, creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship".
He argues that the new U.S. administration, confronted with a record-breaking bilateral deficit and soaring unemployment, could impose prohibitive tariffs or erect other barriers to Chinese goods. The EU, Japan and others would then be permitted by WTO rules to raise barriers against a diversion of Chinese goods to protect their markets, and "some form of Chinese retaliation is certain".
"If intemperate, such retaliation will prompt further action by the U.S. and perhaps other countries, threatening the global nature of the trading system," Scissors concludes.
Michael Pettis, a professor of finance at Peking University, blogged on the same theme last month, warning that Smoot Hawley, the notorious U.S. tariff act that contributed to the Great Depression of the 1930s, could return in a different guise.
