Market Soars on "Whatever It Takes" Mush From Draghi; Another "Saved Again" Moment

ECB President Mario Draghi commented in a speech today that the ECB was "ready to do whatever it takes" within its mandate to preserve the single currency.

I have to ask, is that even news? Apparently it it to the stock market which has gapped up over a percent. Bond yields in Spain also reacted to the non-news.

Yield on the 10-year Spanish bond fell all the way (drum roll please) to 6.95%. Is that really anything to be giddy about?

Let's take a look at additional Draghi comments as reported in the Financial Times article Draghi hints at return of ECB bond buying

The euro strengthened on Thursday after Mr Draghi said the ECB was “ready to do whatever it takes” within its mandate to preserve the single currency. “Believe me, it will be enough,” Mr Draghi told a conference in London.

“To the extent that these premia have to do not with factors inherent to my counter party, they come into our mandate, they come within our remit, Mr Draghi said. “To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate.”

“The ECB appears to be keen to increase the threat of the SMP being woken from its hibernation period,” Mr Wattret wrote in a note. “Are the latest comments a signal that the ECB’s strategy is changing and the SMP is about to be used? Or is it merely a threat to act, designed to put some two-way risk back into markets?

“Our inclination is towards the latter conclusion, though today’s comments from Mr Draghi suggest the former now looks more plausible.”

The comments from the ECB president may also increase speculation about other “unconventional” measures the central bank could take. This week Ewald Nowotny, head of Austria’s central bank, said there were arguments for equipping the eurozone’s forthcoming bailout fund with a banking licence so it could tap the ECB for more funds if needed – although he also said the idea was not being actively discussed by the ECB.

Saved Again? Not

How long this round of "we are saved" euphoria lasts over non-comments remains to be seen, but I suspect not long.
Mike "Mish" Shedlock
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UK GDP Disaster Far Worse Than It Looks; UK Growth in 2012 "inconceivable"

The global recession picked up steam today with news of a UK GDP Shock.

The economy shrank by 0.7pc in the second quarter – far more than the 0.2pc fall expected, as record rainfall and the Jubilee holiday added to pressure from austerity cuts and the eurozone debt crisis.

It marks the third successive quarter of contraction, leaving Britain in its longest double-dip recession in more than 50 years.

The Office for National Statistics showed broad-based weakness across the private sector, with construction output down 5.2pc, industrial production down 1.3pc and services output – which accounts for 77pc of the economy – falling 0.1pc. Only public-sector services output, and business services registered any growth.

“I think it’s inconceivable that there’ll be positive growth this year,” said Gerard Lyons, chief economist at Standard Chartered, forecasting a 1.3pc fall in GDP.

Victoria Clarke, economist at Investec, said the economy would now have to grow by 1.2pc in both the third and fourth quarters for the economy to expand by just 0.1pc in 2012 overall.

In March, the Office for Budget Responsibility, the government’s independent fiscal watchdog, forecast 0.8pc growth this year, which now looks wildly optimistic.

UK GDP Disaster Far Worse Than It Looks

A drop of .7% might not seem that shocking in the US, but that's because the US uses annualized reporting while most of the rest of the world does not.

I asked Doug Short at Advisor Perspectives to show UK GDP as it would be presented in the US.

UK GDP Quarter-by-Quarter Annualized

click on chart for sharper image

Presented that way, UK GDP does look like a disaster. Of course the results were a disaster regardless of how presented, but the US peculiar method of reporting may not be obvious to US readers following European news.

Mike "Mish" Shedlock
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"Actual" New Home Sales First 6 Months of 2012 vs. Prior Years; Reflections on the Housing Recovery

New home sales unexpectedly plunged today, with the biggest drop in over a year.

New U.S. single-family home sales in June fell by the most in more than a year and prices resumed their downward trend, suggesting a set back for the budding housing market recovery.

The Commerce Department said on Wednesday sales tumbled 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest rate in five months. The percent decline was the largest since February 2011.

May's sales pace was revised up to 382,000 units from the previously reported 369,000 units, taking some of the sting from the report.

Economists polled by Reuters had forecast sales at a 370,000-unit rate last month. Compared to June last year, new home sales were up 15.1 percent.

Actual New Home Sales

Reader Tim Wallace provides a look at actual new home sales, six-month running totals, not seasonally adjusted, not annualized, vs. prior years.

click on chart for sharper image

Reflections on the Housing Recovery

Even with today's reported decline, new home sales have likely bottomed on an annual, cumulative-total basis.

However, don't expect much in terms of recovery.

Debt overhang is immense, and student debt is particularly problematic. Lack of jobs coupled with high student debt is capping family formation. Kids out of college are deep in debt and holding off getting married, starting families, and therefore buying houses.

Moreover, home sizes will trend lower and price recovery will be anemic because of boomer demographics. Retired boomers looking to downsize have few buyers able or willing to buy.

Bank-owned real estate (REOs) and shadow inventory are hugely underestimated. That too will pressure prices and sales.

The good news is home sales will add to GDP.

The more realistic news is structural headwinds are immense, demographics are poor, and job prospects for college graduates are poor. The bottom in new home sales may be in, just don't expect anything close to a normal housing-led recovery, because it's not going to happen.

 Mike "Mish" Shedlock
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ESM Banking License? Rumors of Non-Solution Send Sovereign Yields Lower; Purposeful Non-Elaboration

The mantra of eurocrats is quite obvious: When times get tough, roll out already discarded rumors and hope they stick for a while.

Earlier today yield on 2-year Spanish bonds hit 7.14%. The yield now is a still unsustainable 6.42%.

What happened?

The answer is another silly rehash of something the German constitutional court probably would not allow, and is not even being seriously discussed at the moment anyway: a banking license that would allow the ESM to use leverage. 

European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe’s rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout.

“I think there are pro arguments for this,” Nowotny, who heads Austria’s central bank, said in an interview in his office in Vienna yesterday. “There are also other arguments, but I would see this as an ongoing discussion,” he said, adding he’s “not aware of specific discussions within the ECB at this point.”

Granting a banking license to Europe’s permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won’t be enough if Spain or Italy require aid. While ECB President Mario Draghi said on May 24 that such a move amounts to the central bank financing governments, which is prohibited by European Union law, publicly-owned credit institutions such as the European Investment Bank are exempt.

“It is not something that is only in the field of monetary policy, so this is part of a broad discussion,” Nowotny said. He declined to elaborate.

Purposeful Non-Elaboration

Declining to elaborate was a good move from the standpoint of politics. The more that is said about rehashed ideas, the less believable the rumor is. Note that the ECB has already rejected this idea, so has the German central bank and numerous German politicians.

Moreover, no one really wants to discuss this issue now anyway, fearing it might impact a German constitutional court ruling coming up in September.

The game plan, if there is one (other than obvious BS), is to sneak this idea in later, after a favorable court ruling. However, if Merkel really supported this idea, it would have happened already.

It is quite possible the constitutional court picks up on this chatter, and puts an end to the idea even if it approves the ESM. Let's hope so.

Regardless, leverage will not solve anything, anyway. This rehash of a discarded idea might calm the markets for a few days, but that is likely it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Spain 2-Year Treasury Yield Tops 7%, Inversion Between 5 and 10 Year Yields; Spain Sovereign Debt Restructuring Coming Up

Those wondering when the yield on Spain's 2-year government bond would exceed 7% now have an answer. Today is the day.

Note: the lines on the charts below reflect yesterday's close. The numbers in green accurately reflect today's price movements.

Spain 2-Year Government Bond Yield



Of further interest please note the inversion at the long end of the curve. The yield on 5-year treasuries now exceeds that on the 10-year treasury.

Spain 5-Year Government Bond Yield



Spain 10-Year Government Bond Yield



Synopsis

2-Year Yield + 36.5 basis points to 7.007%
5-Year Yield + 12.5 basis points to 7.717%
10-Year Yield + 2.7 basis points to 7.648%

The inversion is slight but the massive yield increase on the shorter end is significant. If this action continues, and I expect it will, the market is pricing in a sovereign debt restructuring of Spain, including bond haircuts.

Mike "Mish" Shedlock
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Record Low Yields Once Again on US Treasuries

Curve watcher's anonymous is noting record low yields across most of the US Treasury yield curve.

US Treasury Curve 2012-07-24

click on chart for sharper image

The above image is just off the absolute lows. The 30-year touched 2.45% and 10-year 1.39%.

Legend

• Brown: $IRX 3-Month Treasury Bill Discount Rate
• Blue: $FVX 5-Year Treasury Note Yield
• Orange: $TNX 10-Year Treasury Note Yield
• Green: $TYX 30-Year Long Bond Yield

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Germany in Recession: Private Sector Sees Fastest Falls in Output and New Business Since June 2009; New Export Orders Collapse

The vaunted German export machine is sinking into the abyss. The Markit Flash Germany PMI® shows German private sector sees fastest falls in output and new business since June 2009.

Key Points

• Flash Germany Composite Output Index(1) at 47.3 (48.1 in June), 37-month low. 
• Flash Germany Services Activity Index(2) at 49.7 (49.9 in June), 10-month low. 
• Flash Germany Manufacturing PMI(3) at 43.3 (45.0 in June), 37-month low. 
• Flash Germany Manufacturing Output Index(4) at 42.8 (44.8 in June), 37-month low.

Summary:

The seasonally adjusted Markit Flash Germany Composite Output Index fell for the sixth month running in July, to 47.3 from 48.1 in June. The index has posted below the 50.0 no-change value in each month since May, and the latest reading signalled the fastest pace of private sector contraction since June 2009.

Manufacturers suffered a sharper drop in business activity than service providers during July, as well as a greater loss of momentum relative to the situation in June. The latest reduction in manufacturing production was the steepest for just over three years, while new orders received in the sector dropped at the fastest pace since April 2009. Service providers recorded only a marginal decrease in business activity, although the rate of contraction was the joint-fastest in three years.

Across the private sector as a whole, new business intakes fell at the quickest rate since June 2009, with manufacturers and service providers both recording much sharper declines than during the previous month. Lower levels of new work have been recorded in the service economy during each month since April, and the latest reduction was the fastest for exactly three years. Meanwhile, in the manufacturing sector, new export orders declined at the steepest rate since May 2009, which contributed to a thirteenth successive monthly fall in total new business volumes.

July data pointed to a sharp and accelerated fall in outstanding business across the German private sector. ....

Flashback January 09, 2012: Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year"

In what is likely the silliest comment of the year so far, Christine Lagarde says Europe may avoid recession this year

Flashback January 12, 2012: German Economy Contracts in 4th Quarter; Spain's Industrial Output Plunges 7%; UK Trade Deficit Widens; European Banks Wisely Hoard Cash

If Europe heads into a prolonged recession (and it has already started), Germany cannot help but get sucked into it. Approximately 28 percent of German GDP is derived by exporting goods to EU countries and Switzerland.

Think German exports to the rest of Europe are going to rise forever? Think again, starting with a look at the Eurozone's 4th largest economy. ...

Flashback February 23, 2012: Don't Worry, It's Only a "Mild Recession"

The economic clowns in the EU have finally acknowledged something that was blatantly obvious at least six months ago (and a lot longer if one factored in the likely effects of multiple austerity programs in numerous countries).

However, the economists' new conclusion is about as silly as the "no recession" call that preceded it. The new forecast: there will be a recession in the eurozone but not the EU and it will be "mild".

Such nonsense went on for months actually. Economists were behind the curve every step of the way even though it should have been blatantly obvious what was about to happen.

Global Recession Revisited

On July 6 I wrote Plunging New Orders Suggest Global Recession Has Arrived

Clearly I am not changing that prognosis although I do wish to reiterate the definition of "global recession as per my post Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?

Contrary to popular myth, recession does not mean two consecutive quarters of economic contraction. Rather, two consecutive quarters of economic contraction is a sufficient, but not necessary condition.

In the US, the NBER is the official designator of recession start and end points. Many recessions have started with GDP still growing.

The "Conditions for Global Recession" are even looser. "The International Monetary Fund (IMF) considers a global recession as a period where gross domestic product (GDP) growth is at 3% or less. In addition to that, the IMF looks at declines in real per-capita world GDP along with several global macroeconomic factors before confirming a global recession."

Mike "Mish" Shedlock
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