Recap 7-24-12

Main Items:

  • US Markit US Preliminary PMI declined to 51.8 in July 52 exp and 52.5 prev.
  • FHFA Home price Index improved 0.8% MoM in May, and 3.7% YoY.
  • Yesterday Moody’s cut its outlook for Germany, the Netherlands and Luxembourg to negative from stable. “Moody’s now has negative outlooks on those Aaa-rated euro area sovereigns whose balance sheets are expected to bear the main financial burden of support — whether because of the need to expand the European Stability Mechanism (ESM) or the need to develop more ad hoc forms of liquidity support.”
  • A report in Spain’s El Economista newspaper claims the country is considering asking Europe for a full liquidity program if the ECB doesn’t revive the SMP and start buying Spanish government bonds.
  • UPS earned $1.15 per share versus $1.17 expected. They cut guidance to $4.50-$4.70 from $4.75-$5.00. The street is at $4.82.
  • POSCO said Chinese steel demand will bottom out in Q3 due to Beijing’s stimulus measures although any rebound would be weak – Reuters
  • The CBO said that paradoxically, the Supreme Court ruling on Obama care will lead the 3 million MORE uninsured by 2022 because it does not require states to follow it. –NYT


  • EU Composite PMI was stable at 46.4 in July as exp.
  • EU Mfg PMI declined to 44.1 in July vs 45.2 exp and 45.1 prev.
  • HSBC flash PMI in China increased to 49.5 vs 48.2 prev

Upcoming Data:

  • Wed: German IFO, UK GDP,
  • Thurs: US DGO, Jobless Claims, Pending Home Sales, Japan CPI
  • Fri: German CPI, US DGP, UMichigan Confidence

Commentary & Links:

EU Banks are able to source essentially unlimited liquidity from the ECB. As a result, Euribor futures and the Euribor-Eonia basis are not a good measure of market stress. Rather, the front end of EU sovereign yield curves, which do not have ECB support, is a better measure of that. And the view there is unnerving. It has already been noted that 2y Spanish yields breached 6% yesterday, the de facto level that historically has coincided with the closure of market access. But fairly quietly, 2y Italian bond yields rose 42bps today, to 5%, after rising 41bps yesterday and 37bps on Friday. Even French 2y bonds, which touched 5bp yield a week ago, has seen yields go up 10bps both today and yesterday. The most worrying thing, of course, is the rise in German yields. While 2yr and shorter German bonds so far have remained stable, 5yr bobl yields have increased 6.5bps since last week, at a time when the Eurostoxx 50 sold off almost -4%.

At this juncture, it’s unclear if the EFSF/ESM alone is sufficient to contain market stress. Usage of its finite resources to support Spain will inevitably result in additional pressure on Italy, and then France, since the market is well aware that a Euro for Spain is one less Euro available for Italy. Once again, it appears that the ECB will be called upon to save the day.

The next ECB meeting is on 8/2. It is apparent to many observers now that the biggest constraint in Europe isn’t liquidity, but capital. As a result, the only tools the ECB have remaining in its tool kit that are likely to be effective over the short term are the easing of collateral constraints along with a possible reactivation of the SMP.

The ECB will have to do something. If you think the ECB is committed making sure that Spain doesn’t default, going long short maturity EU fixed ahead of the meeting looks interesting.