On the Inflation front and especially in a sensitive country like Spain, today's inflation data was well above consensus of 2.8 (previous of 2.7) and actual 3.5%. This i very bad news for a country with 25% general unemployment, 50% youth unemployment and as of yesterday, a country ready to hike taxes, undertake labor reforms and mess with people's pensions (meaning changing the terms and using the money-can you say, "Lock-box"?)
Also in a bad sign which was probably initiated at the same time the EU decided on a Spanish Banking bailout of $100 bn Euros, well more than any estimate of their needs were at the time and presently, however the trouble we spotted immediately was that it would come from the ESM bailout mechanism which still has not been ratified, but told bond traders something they didn't want to hear, all debt would be subordinated to the ESM, meaning the ESM gets paid before anyone including the bond traders who had been buying Spanish debt and supporting yields, right after that is when Spanish yields soared over 7.5%, totally unsustainable until Draghi jawboned them down. Now today from Spain we get information on Spain's sovereign debt secondary market trade data, the trade volume in Spanish debt has dropped nearly in half since this time last year, actually a 40% decline as bond traders are afraid they won't be repaid because of their positions being subordinated by the ESM.
This low level of secondary market activity is actually the lowest since before Spain joined the Euro, back to 1996!!!!
To add to their worries, in yesterday's Spanish 2013 budget presentation, it looked very likely that holders of corporate credit/debt in bad banks, would likely take severe losses. In addition, it looked likely that sovereign debt holders (bond traders) may face a Greek-like debt restructuring that robbed Greek bond holders of 50-75% of the value of their holdings, even though it was billed as a 1-time event, it' looking more likely that the "Haircut" will hit Spanish bond holders which means expect the secondary market to dry up even more and oon the primary market-Spain's only way to finance deficits short of a bailout may soon also come to a grinding halt. After all, it was just this week that Germany, the strongest bond in Europe saw it's 10 year auction of $5bn Euros go down the tubes with offers on $3.5 bn only, a failed auction in the strongest EU nation, what of Spain? A bailout may be needed sooner than most expect and Spain is still unwilling to accept the bailout terms, whatever they are, Spain has said, "No CONDITIONS!".
In the US, Chicago PMI was released today...
Released On 9/28/2012 9:45:00 AM For Sep, 2012
Prior | Consensus | Consensus Range | Actual | |
| Business Barometer Index - Level | 53.0 | 53.0 | 50.2 to 54.0 | 49.7 |
The devil in the details, the F_E_D's new QE3 mandate, employment suffered a the employment index hit a 30 month low! New Orders and Deliveries saw the 3 month moving average at the lowest since mid 2009. Capital expenditures on equipment hit a 17 month low. Although we have been seeing this trend world wide in maufacturing and none should be a surprise, it's still hard to believe that input costs or "Prices Paid" soared from 57 to 63.2.
To summarize, the trends in manufacturing have been a lack of new orders, higher inventories, slower shipments (see the transports index), sliding employment, lower capacity utilization due to high inventories and a lack of new orders/deliveries and finally, rising input or material costs. This report today was important as it confirms almost EVERY SINLGE manufacturing report not only in the US, but worldwide. When input coasts rise and bottom line profits fall, they call that "Stagflation", stagnate growth combined with rising inflation. This almost guarantees Q3 GDP will be horrendous as we just saw the final Q2 GDP reading yesterday and that wasn't pretty.
The first Q2 GDP print was, then revised to a higher 1.7 with the final reported yesterday at a very grim 1.25%, this was lower than even the lowest consensus estimate of 1.4% and the lowest print since January 2011.
Now for perspective, follow the trend in GDP across the quarters: Q4 2011: 4.1%; Q1 2012: 2.0%; Q2 2012: 1.25%
I wish I was better with excel so I could provide an info-graphic, but I think the trend from 4.1% to
1.25% is quite clear and obviously heading for recession.
I would guess that Bernie had advance knowledge of this data before starting QE3, but as usual it seems the F_E_D is a bit behind the ball, but at least know we know why the F_E_D pulled a panic move in what otherwise to that point had been a non-panic environment. I just wonder if there' more we haven't heard of yet?
Not that it probably matters much, but after Spain was cut to Junk credit yesterday, Fitch warns that the UK is likely to lose their AAA status next.
And the dichotomy between inflation driving unemployment and every other metric in manufacturing showing no signs of improvement that would be even a start towards more hiring and the F_E_D's inflationary QE3 policy come crashing together and seem to make things worse, not better. As I stated when QE3 was announced, the employment cover story (as QE has never been shown to help employment) was likely nothing more than a cover story as the F_E_D probably had data on something much worse and didn't want to start a panic. Now at least we know the employment theme likely was a cover as Q2 GDP hit the skids massively and we see GDP go from 4.1% 2 quarters back to 1.25% for Q2, we are probably only 1 or 2 quarters away from a recessionary print. Still the question lingers, "Is the F_E_D aware of something even worse?"
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