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Europe Weekly Summary

Courtesy of Tyler Durden

A recap and look at things to come from the ever optimistic Dane, Goldman’s Erik Nielsen

Happy Saturday,

First of all, to my many colleagues at Goldman to whom I mistakenly sent an email yesterday soliciting suggestions for what to cover in today’ email: My apologies – I meant to send it to our own little team, but hit the wrong send-list.  That said, many thanks for the huge number of suggestions I got; I have been truly overwhelmed by the enthusiasm.  I’ll be covering a number of the issues you suggested, but many of them we’ll have to take bilaterally, unfortunately.

So, fresh from having watched Germany outplay Argentina – and following the Netherlands’ triumph over Brazil yesterday – I cannot help think that the Euro-zone seems to outperform expectations in football pretty much as they do in terms of economic performance.  If Spain does its job tonight, the Euro-zone will be occupying three out of the four semi-finalists spots down in SA.  Who would have thought…

Here’s how Europe looks from the shade of my chestnut tree here in Chiswick:

  • In the battle between stress markets and the real economy, last week went to the markets – but all due to poor data from the rest of the world.
  • Marginally good news on the banks; we are all looking forward to the stress tests in 4-5 weeks.
  • Confirmed decent growth indicators out of the Euro-zone this past week – and great growth numbers out of Ireland and Spain!
  • The IMF has been busy this past week in Europe, extending the credit line to Poland, disbursing to Romania and agreeing a loan to Ukraine.
  • Finally, call someone! – roaming became a lot cheaper in Europe this past week, thanks to the EU.
  • Looking ahead – first and foremost, happy Fourth of July tomorrow!
  • We’ll get industrial production numbers for May throughout Europe this coming week; we think they’ll all look pretty good.  In the Euro-zone, Spain already reported, and we’ll get Germany, France and Italy this coming week.
  • ECB meets on Thursday and the Watchers’ conference is on Friday.  Listen out for what they think of Eonia and Euribor – and the banks.
  • The UK also prints IP and manufacturing production (should be okay), and the MPC meets (no change.)
  • Switzerland prints inflation (no core deflation, we think) as well as unemployment (unchanged.)
  • Sweden and Norway print manufacturing production and inflation this week – production up and inflation down in both; nice combination.  Hungary also prints manufacturing production; we expect another very strong number, led by exports.
  • Poland is holding the second round of its presidential election tomorrow, Sunday.  Hugely important for the policy agenda.

-1            In the increasingly epic battle between the financial markets stress and the recovery in the real economy, I guess I should give last week to the financial markets, although any points taken this past week by the troubled markets were taken outside Europe.  Equities were hammered, of course, but they were driven by the poor numbers out of the US and what was interpreted as poor Chinese numbers (but give me a break; Chinese demand remain strong, and the Chinese authorities are obviously not too worried either since they let the FX move stronger again yesterday.)  Meanwhile, European sovereign spreads did quite well this past week, and Spain sailed comfortably through their auction on Thursday (in spite of the latest warning from Moody’s – and so it should be!)  While the auction probably was bought overwhelmingly by Spanish banks, I have noted that Spain’s Deputy Finance Minister, Jose Manuel Campa Fernandez, has been doing the rounds among US investors this past week, and from what I hear from people having met with him, the show has been impressive.

-2            On the data front, the possibly most exciting number out last week was the ECB’s report that Euro-zone banks had increased their lending to non-financial corporates for the first time in 16 months.  Yes, its only one number, as everyone was busy reminding me, and while it certainly may start declining again, every new trend does start with one number.  The increase is more than three months earlier than we had expected, so maybe there is hope for an earlier than expected contribution to growth from fixed investment.  We’ll see.   There were also other good news out last week raising some (moderate) hope with respect to the banks, including the orderly unwinding of the ECB’s first 12-months LTRO and its drain on excess liquidity.  And looking ahead, I have been impressed with the policymakers’ response to market concerns about the upcoming stress tests.  The tests have been expanded to up to 120 banks, including all the Spanish banks and several German Landesbanks and the definition of “stress” has become more realistic, as well.  Reportedly, some Landesbanks have pointed out that they have no legal obligation to publish confidential data, but to me this is not a major issue.  If we can get clarity on some 100-110 Euro-zone banks, including the Spanish banks (and please be realistic here on real estate related assets!) followed by proper re-capitalisation, then we are a good step closer to restoration of a critical mass of the interbank market.  (For an overview of where we stand right now on Spanish bank reforms, please see European Weekly Analyst from last Thursday.)  As far as I know, publication of the stress tests is planned for end of July, although I have seen press reports suggesting that it’ll be on July 23.  The FT reports that the tests will lead to capital raising of €30bn; €20bn of which from public sector banks – sounds low to me.  Personally, I don’t think this in itself will trigger the use of the EFSF; if it gets activated then my guess would be that it’ll be for Portugal to get their reform process accelerated into higher gear.

-3            On macro data, we had the Euro-zone PMI confirmed at 55.6 (consistent with GDP growth of +0.7%qoq, non-annualised).  This means that we are still sitting a bit above the trend number, so we should expect further moderate declines in the months to come.  Maybe more importantly, we had generally good numbers out of the battered periphery: Ireland reported a much stronger than expected Q1 GDP (+2.7%qoq), officially ending their recession just a couple of quarters after the implementation of the greatest fiscal consolidation plan in recent history.  And Spanish industrial production also surprised on the upside, rising 5.1%yoy in May after having risen 2.9% in April.  Twelve out of Spain’s Comunidades Autónomas reported positive year-on-year growth in May.  Meanwhile, Spanish jobless claims also came in better than expect in June (83,834 vs 65,000 expected), bringing the total below the still dreadfully high 4 million for the first time since the onset of the crisis.  If you are puzzled how economies can grow in the midst of fiscal tightening, you need to read Ben Broadbent and Kevin Daly’s excellent Global Economics paper from two months ago.  Outside the Euro-zone, UK purchasing managers reported a sharp drop in exports, which the UK papers quickly interpreted as a sign of the weakness in Continental Europe.  I disagree.  All the smaller and more open economies on the outskirt of the Euro-zone, including Sweden, Poland and Switzerland are all doing great, even to an extent that Riksbank started its hiking cycle this past week.  The problem with UK exports is more likely related to a product composition that does not fit so well, as well as the recent sterling appreciation.

-4            The IMF has had a busy week in Europe:  First, they approved a one-year successor arrangement for Poland under the Flexible Credit Line  facility, making about €24bn (1,000% of quota) available to the government, if needed (the Poles say they’ll treat the credit line as precautionary without any intention to use it;) they completed the fourth review of the Stand-by with Romania and disbursed €1.3bn; and they announced a “Staff Level Agreement” with Ukraine on a €18bn Stand-By Arrangement.  They are also in Portugal these days, but this is (still) just routine stuff.  When you see these three agreements, you do wonder why a number of people doubt that countries, like Portugal, Spain, or Ireland couldn’t qualify for IMF funding, if they were to need it (and yes, the IMF has still plenty of money)!

-5            Finally, as a devoted European, I have to remind my fellow Europeans that your mobile roaming tariffs dropped significantly last Wednesday (July 1); courtesy of European Commission interventions.  Interesting how most newspapers (particularly in this country) seem to forget to mention these types of benefits of being member of the EU!   

Looking at the week ahead:

-6            First of all, happy Fourth of July to my many American friends.  This was one of my favourite holidays during my many years in the States – still missing it rather badly, even on a beautiful day in Chiswick like today!

-7            In the Euro-zone, industrial production numbers for May will begin to roll in this coming week.  These are very important numbers for our GDP forecast (E-Map relevance score of 5), and in the present environment they seem to be even better indicators than the usually supreme PMIs.  As discussed above, Spain already reported yesterday, setting (hopefully) the tone with a block-buster +5.1%yoy (+3.3% corrected for calendar effects).  Germany follows on Thursday (we expect +0.1%mom) and France and Italy report on Friday (we expect +0.2% and +0.5%, respectively.)  If we are right on these forecasts, then our once exuberant looking +0.9%qoq (non-annualised) GDP forecast for Q2 looks pretty alright again.  (I hope the writers at Time Magazine – whose main story this week is: “Why Europe Can’t Get Off The Ground” – take a look at these numbers!)

-8            The ECB meets on Thursday; there’ll be no change in policies or message, but it’ll be interesting to hear if Trichet will say anything about the exit strategy.  I rather suspect that they are not too sorry to see Euribor drift slightly higher.  We think it’ll get to about 1% by year-end, which should set the stage foer the first formal rate hike in 2011’Q2 – i.e. unless the rest of the world de-rails us! (been a while since you heard that one?)  He may also be encouraged to say something about the banks now the €442bn is out of the way.  On Friday, there is the annual “ECB and its Watchers” conference in Frankfurt; the highlight of the year for us ECB watchers.  Alas, I won’t be there this year because my wife – for unexplainable reasons – has booked me Friday night in New York for something she claims has greater social value than the ECB!  Fortunately, Dirk Schumacher will be there and report on anything interesting, so look out for emails from Dirk on Friday.

-9            In the UK we’ll get three important releases this week: On Monday we’ll get the last of the three June PMIs (for services), which may also move slightly lower from May’s robust 55.4 level, but nothing to worry about.  On Thursday we’ll get industrial production and manufacturing production for May; they were both down 0.4%mom in April – would be good to see some hard number recovery by now.  Finally, the MPC meets on Thursday, but there’ll be no change in anything.

-10          There are three key releases in Switzerland this coming week:  First, there is June CPI on Tuesday, where the key issue will be whether May’s sharp decline in core inflation continues (maybe even into negative territory); we don’t think so – we expect a small uptick in core from May’s +0.2%.  Second, unemployment is out on Thursday (we expect unchanged 4.0%), and finally, and indeed least important, May retail sales emerges Monday morning (we expect a small increase, but these are volatile numbers.)

-11          In Sweden it’s time for CPI inflation for June (Thursday) and industrial production (Emap relevance 3) for May (Friday).  In line with the Riksbank’s projections, we continue to expect a sequential easing in CPIF inflation to come through in Q2 and Q3, as the inflationary effect of SEK depreciation fades (or indeed reverses with SEK strengthening) and the size of the output gap continues to contain inflationary pressure.  On Friday we expect a third month of marked improvement in IP.

-12          In Norway it’s the other way around: First manufacturing production (Emap relevance 4) for May on Wednesday and inflation on Friday.  We expect production to increase to +0.5%mom, after 0.2% in April.  Inflation should tick down on base effects for June: we expect CPI-ATE inflation (inflation ex energy and tax changes) to fall to 1.2%yoy from 1.5% in May.

-13          Hungary also publishes industrial production this week.  We expect another strong number in line with the rest of the region, with the year-on-year growth reaching some 9% in May.  As was the case in the previous months, we expect most growth to occur in the exports-oriented sectors.

-14          The second round of Poland’s presidential elections takes place tomorrow, Sunday  July 4. The two candidates who attracted the most votes in the first round will face each other in an increasingly narrowing battle for the presidency: Bronislaw Komorowski, candidate for the governing Civic Platform (PO), and Jaroslaw Kaczynski, leader of the main opposition party, Law and Justice (PiS) and riding high on sympathy (and his new soft touch) from the death of his brother.  Komorowski, currently Speaker of the House and acting President, won the first round, and recent polls suggest he will win in the second round. But Kaczynski has been gaining in popularity and the final race may be very close.  Magda Polan has commented that a Komorowski’s win would mean that initiatives pushed through parliament by the governing coalition would not be vetoed (as was the case during the cohabitation period with late president Lech Kaczynski) and would enable the government to pursue the more ambitious fiscal and structural reforms needed to ensure long-term fiscal sustainability.  If Kaczynski wins, this will be one of the most impressive comebacks in Polish politics since the beginning of the transition process, albeit achieved in extremely unusual circumstances and on a strong wave of sympathy vote.  Kaczynski’s victory would at best preserve the status quo, and further reduce the chances of implementing cuts to entitlements, necessary to reign in public debt.  Moreover, it could break a governing coalition (PO and PSL), leading to early elections.  According to the recent polls, PO still commands largest voter support and could form a coalition with just one other party. Support for PiS is fairly high but, most likely, it would have to form a difficult coalition of three parties, resulting in a weak government not willing to push for any structural reforms that could lift potential growth and improve the long-term fiscal position and reducing the prospects for EMU accession in the next five years.

… and that’s the way Europe looks to me on this lovely afternoon.  Next weekend I’ll be in New York, so I am not sure you’ll hear from me for a couple of weeks unless something dramatic happens.

I hope you all enjoy the summer as much as I do.

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