Recap 6-5-12

Main Items:

  • US ISM Non-Mfg vs 53.4 exp and 53.5 prev
  • Spain makes its first call for outside funds. The budget minister said Spanish banks do not need excessive amounts to recapitalize, the question is “where that figure comes from.” “That’s why it’s so important that the European institutions open up and help us achieve, help facilitate, that figure because we’re not talking about astronomical figures.”
  • BoC kept policy unchanged as expected. “To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate … The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”
  • RBA cut 25bps to 3.5% as exp. “the Board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.” Markets are pricing in 3 more cuts through year end.


  • Italian Services PMI improved to 42.8 in May vs 42 exp and 42.3 prev
  • Australia Services PMI improved to 43.5 in May vs 39.6 prev
  • China HSBC Services PMI improved to 54.7 in May vs 54.1 prev

Upcoming Data:

  • Wed: UK PMI Construction, EU GDP, ECB, US Unit Labor Costs, Australia Employment
  • Thurs: French Unemployment, Swiss Unemployment, Swiss CPI, UK PMI Services, BoE, US initial jobless Claims, Japan Trade Balance
  • Fri: Japan Eco Watchers Outlook Survey, UK PPI, Canada Employment, China CPI, PPI
  • Weekend: China IP, Retail Sales, Trade balance, money supply


Spain continues to push for a direct bank recapitalization, prevaricating by saying that the amount needed is not large. But a small recap is very unlikely to stop the flow of deposits from leaving the country since it would not restore confidence, while simultaneously setting a precedent for all EU banks. A possible result of this is that many EU banks (especially in Greece!) will clamor for ESM funds, which could then be quickly depleted.

The more likely scenario remains a sizable Spanish bank recap after a formal Spanish request for ESM (or less likely, EFSF) assistance. Note that because it takes a few weeks for EU/IMF/ECB officials to asses the situation, ECB funding assistance may be needed in the interim. But since a formal request is highly unlikely to be denied, the announcement itself of a formal assistance request is likely to be positive for risk assets, at least over the short term. A sustainable upward move will likely require a large cash disbursement and improving economic data.