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Spain has sold €2.2bn of bonds, more than it had targeted – but at a high cost. The average yield on the five-year bond has jumped to 6.072% against 4.96% at the last auction.
The yield on the three-year bonds rose to 5.547% from 4.876% at the previous auction, and the yield on the two-year bonds leapt to 4.706% from 2.069%.
It’s amazing what difference a little sunshine makes, says Alan Clarke at Scotia Bank, who has crunched the latest UK retail sales numbers.
Some decent news at last. Including auto fuel, sales rose by 1.4% m/m. Stripping that out, sales were up by 0.9% m/m.
Headline sales were always going to be supported by a bounce in auto fuel sales. However the strength was not all down to auto fuel. Clothing sales bounced by almost 3½%. April was a washout, so consumers’ appetite for spring fashion was dampened. By contrast, there were 60% more sunshine hours in May (and 10% more than the seasonal norm), and it was also a bit warmer, which helped to boost this component.
Food sales also did ok, probably for the same reason as there was opportunity for a bbq or two.
More generally, the trend in consumer spending should be improving as the burden from non-discretionary spending (i.e. food and energy) continues to ease, which makes more room for faster discretionary spending.
The trend in retail sales should therefore be upwards from here, helping to contribute to better news for growth as the year progresses.
Meanwhile, in Britain shoppers turned out in force in May, splashing out on clothes and shoes as the weather improved (temporarily). Retail sales volumes bounced back 1.4%, although that was not enough to reverse April’s 2.4% fall.
Eurozone PMI signals double-dip recession, says Peter vanden Houte at ING.
All in all, today’s still dismal PMI figures show that even Germany is now starting to suffer on the back of the uncertainty created by the euro crisis and the clear deceleration of activity in the emerging economies. Our expectation of 0.4% contraction in second quarter GDP is starting to look conservative on the back of the latest figures.
It seems clear that no significant recovery can be expected as long as the future of the Eurozone remains in doubt. Therefore markets will be awaiting a strong commitment from European leaders at the summit next week to take the necessary steps to strengthen the monetary union in the coming years. Joint issuance of short term bonds, the establishment of a debt redemption fund and steps towards the creation of a banking union are likely to be on the agenda.
Since Treaty changes might be needed to implement some of these plans, which might take years, we expect more immediate action from the ECB after the summit. A 25 basis point rate cut for July now look all but sure, but additional liquidity injections (LTRO, liquidity access for the ESM) might also be contemplated if market tensions don’t subside after the summit.
The next few weeks will be crucial for the Eurozone. If anything, today’s figure can serve as a wake-up call for European leaders that decisive action is badly needed.
Stephan Rieke, economist at BHF Bank, reckons the ECB will spring into action next month:
This is not a surprise for the ECB or the market. The expectations were very negative before the publication of htese numbers and they are still quite negative. The ECB already pointed to heightened uncertainty and heightened downward risks to growth. I think they just wanted to wait with action until the whole package is prepared.
I’d expect the ECB to act in July at the latest. Which means on the one hand interest rate cuts, of course, combined with a package of measures that the eurozone finance minsters are preparing. I would expect more than just a rate cut. More non-conventional measures you might say.
Howard Archer, chief UK and European economist at IHS Global Insight, concurs:
The only remotely positive spin that can be put on the dismal eurozone purchasing managers surveys for June is that there was no further deepening in the overall rate of contraction in services and manufacturing activity. Hardly a cause for celebration!
The surveys reinforce pressure on the ECB to cut interest rates and we suspect a 25 basis point cut from 1% to 0.75% is very much on the cards for July. The lower price indices evident inthe PMI surveys add to the evidence that inflationary pressures are easing in the eurozone, giving the ECB ample scope to trim interest rates.
Dominique Barbet at BNP Paribas:
The picture is not changing, it is not improving, and the PMIs are still clearly in recession territory for the eurozone. For the time being, and if we cannot sort out the financial crisis especially with the summit at the end of this month, the eurozone is likely to remain in recession.
Peter Dixon at Commerzbank:
The ECB will do more, that will probably involve a rate cut, which is symbolic but is action. If the need arises they will come back into the market with more LTROs despite the fact it is something they said they were not considering.
The eurozone private sector has taken another turn for the worse, according to the latest PMI business surveys. The composite PMI – made up of both manufacturing and services – was at 46 in June, unchanged from May – indicating further contraction. The 50 mark divides expansion from contraction. Services came in at 46.8 versus 46.7 in May, a tad better but still shrinking, while manufacturing was worse at 44.8 against May’s 45.1.
The manufacturing and composite PMI readings are the lowest since June 2009, which doesn’t bode well for the eurozone economies.
Ilya Spivak, currency strategist at DailyFX, looks ahead to the eurozone finance ministers’ meeting, the Spanish bond auction and the publication of the Spanish bank stress tests:
Eurozone finance ministers begin a two-day meeting in Brussels. Coming on the heels of the G20 summit where EU policymakers faced heavy pressure from global leaders to step up crisis containment efforts, the sit-down may see the emergence of preliminary policy ideas. Concrete initiatives are likely to wait until the EU leaders’ summit next week, but traders will nonetheless pay close attention to sideline commentary for early clues.
Spain is also set to release the results of an audit meant to put a firm price tag on recapitalizing the country’s banking sector. A number above or uncomfortably close to €100bn – the upper limit of the bailout Madrid secured last week – is likely to rekindle sovereign risk jitters. The results of a bond auction offering 2014, 2015 and 2017 paper today will serve as an instant barometer of the fallout, with a pick-up in average yields and/or particularly weak bid-to-cover readings likely to compound pressure on risky assets.
The French manufacturing PMI, by contrast, improved slightly, whilst showing further contraction. It came in at 45.3 for June compared with 44.6 in May, and was better than expected.
And the situation in the French service industries also improved, with the PMI rising to 47.3 from 45.1 in May – but remaining in negative territory.
The euro has tumbled to a session low of $1.26573, following the weak German manufacturing figures.
The PMIs are out – well on Twitter anyway. Terrible German manufacturing PMI of 44.7 in June versus 45.2 in May, the weakest since July 2009. Service industries are still expanding, but also weaker, with the PMI at 50.3, down from May’s 51.8.
The immediate reaction on Twitter was “horrid” and “yuck”.
Brent crude has hit the lowest level in 18 months, tumbling to $92 a barrel, amid fears over world demand. China’s manufacturing sector continues to slow and the Fed’s latest measures dashed hopes for more aggressive steps to boost the world’s largest economy.
An unexpected rise in US crude inventories last week also hit Brent, which has slid 28% since reaching a peak above $128 a barrel in March.
China’s factories contracted for the eighth month in a row in June with export orders the weakest since early 2009, according to the HSBC flash Purchasing Managers Index, the earliest monthly indicator of China’s industrial activity.
“Obviously any indication that the Chinese economy is slowing more than expected will put further pressure on oil prices, and commodities,” said Michael Creed, an economist at National Australia Bank.
European stock markets have opened lower, as expected. The FTSE 100 index in London is off 0.4%, or 23 odd points, at 5598. Germany’s Dax has started the day 0.5% lower while France’s CAC has shed 0.4%, Spain’s Ibex has tumbled 1% and Italy’s FTSE MiB has lost 0.6%.
Investors are cashing on on a four-day rally after the Fed stopped short of announcing a new round of quantitative easing and China released more weak economic figures.
On bond markets, the Spanish ten-year yield has edged down to 6.755%, below the 7% danger mark, while the Italian equivalent is at 5.76%.
Here is today’s agenda. Spain is in the spotlight again: it will attempt to sell €2bn of two-, three- and five-year bonds around 10am. The expectation is that it will get it all away, but at high yields.
Two independent reports on the country’s banking system are expected a few hours later, whereupon Mariano Rajoy’s government will make a formal request for bank aid. How much of the offered €100bn will be needed? Some numbers that are being bandied around are in the region of €70bn. Certainly the IMF’s estimate of €37bn three weeks ago looks to be wide off the mark.
• Revised June manufacturing and services PMIs for Germany, France and eurozone
• Finland votes on ESM at 8am
• Spain holds €2bn bond auction around 10am
• Spanish bank stress tests
• Eurogroup press conference at 7pm
• Greek cabinet to be unveiled
All times BST
Well, this promises to be an interesting day. Welcome back to our rolling coverage of the eurozone debt crisis and world economy.
Greece has a new Conservative-led government under Antonis Samaras, but the US Federal Reserve’s extension of Operation Twist last night seems to have fallen flat… To sum it up: Fed twists again, but no QE3 yet.
Andrew Taylor, market strategist at GFT, says:
The Fed delivered what the majority of the market had priced in but seems now that it is here markets seem unsure of how it was supposed to help.
Traders who enjoyed a rally on the hopes of Operation Twist are only now calculating that its affects are minimal if anything at all. This programme was definitely not pulled out of the Fed’s ‘stimulatory’ toolbox, in fact, it should have been in a box on the wall that says ‘break glass if you are out of solutions’.
Spanish bond yields fell sharply yesterday in the wake of speculation that Europe’s leaders were thinking about allowing bailout funds to buy bonds directly, even though German chancellor Angela Merkel poured cold water on the idea saying it was “purely theoretical”.
Michael Hewson, senior market analyst at CMC Markets UK, says:
The idea will certainly be on the agenda at the start of today’s two day EU finance ministers meeting, but it is a long way from being a work in progress, simply because the new ESM doesn’t even exist yet.
Markets are eagerly awaiting a Spanish bond auction of €2bn of two-, three- and five-year bonds later this morning, as well as two reports on Spanish banks that should shed light on how much of the mooted €100bn bailout will be needed to recapitalise the sector. The €37bn figure suggested by the IMF earlier this month certainly looks much too low.