Recap 8-30-12: EU Rebalancing


How far do along do you think the EU has rebalanced? According to the Nomura Research Institute if recent trends continue, we may only be a 3 years away for the smaller peripherals. h/t FTAlphaville.

Of course, rebalances, especially significant ones, rarely occur in a linear fashion. The risk is clearly skewed towards a steeper and possibly longer resolution: not only are the periphery labor costs likely to decline faster, (a la Greece) but the gradual upward trend in German labor costs also appears unsustainable given the weakness in recent German data.

However, it’s worthwhile to note the possibility that if recent historical trends do play out, (and the data is accurate!) the necessary rebalancing is ~30% completed. While there is still years to go, in such a scenario, the Eurozone is by no means doomed, although economically it is likely to underperform for at least another year. This timetable is likely much shorter than many Euro-skeptics believe.

The near term outlook, as compared to the longer term one, suggests some interesting trade opportunities. For example, Eurostoxx dividend futures are currently pricing a trough in dividends in 2018. A small steepener bet in that space may possibly be interesting, asymmetric, pro Eurozone trade.


  • US Personal Income rose 0.3% in July as exp. Personal Spending rose 0.4% vs 0.5% exp
  • US Core PCE deflator declined to 1.3% YoY in July vs 1.4% exp and 1.5% prev
  • South Korea Mfg Survey improved to 75 in Sept vs 70 prev
  • German Unemployment increased 9k in Aug vs 7k exp and prev
  • Iron Ore is down 10% in the last 3 days and 21% since June.

Upcoming Data:

  • Thurs: Japan PMI, CPI
  • Fri: Month End, Jackson Hole, Month End, Italy Unemployment, EU CPI, Unemployment
  • Sun: South Korea PMI, China Non-Mfg PMI, HSBC Mfg PMI
  • Mon: US Labor Day, ItalyMfg PMI, Brazil Mfg PMI
  • Tues: EU PPI, US Markit PMI, ISM, China HSBC Service PMI
  • Wed: Italy Services PMI, UK Service PMI, US Labor Costs, BoC