“A slowdown in the recovery of eurozone manufacturers (alt) was confirmed on Monday, with a closely watched poll of purchasing managers falling to its lowest level in six months in May…’Taken together, the PMI surveys [for manufacturing and services activity] are pointing to a second-quarter GDP increase of about 0.5 per cent’…The reading for [Germany] fell to a seven-month low of 52.3.” Meanwhile, German inflation data released this morning was disappointing: “data from six states showed annual inflation rates ranging from 0.6 percent to 1.1 percent…Euro zone inflation stood at 0.7 percent in April – well below the ECB target of close to but just below 2 percent.” So yes, the market is going to be pretty fixated this week on the ECB announcement, “and expectations are high when it comes to action from President Mario Draghi…with the euro near a three-month low against the dollar – a much more comfortable level for the ECB after the single currency fell more than two percent over the last month – the risk is that Draghi falls short of expectations.” Which seems really likely since expectations range from “bond-buying bazookas” to “no-drama anti-heroism.” Meanwhile, as interest rates and inflation have stayed low over the past year, and the dollar has weakened against the euro, there seems to be a competition brewing between the European Central Bank and the Federal Reserve (alt) “to weaken currencies and stimulate economies.” Furthermore, “the ECB would prefer to go no further. In its best-case scenario, a pick-up in eurozone growth will eventually push inflation higher — helped by a strong dollar and a correspondingly weaker euro. If that does not happen, the ECB may well find itself, reluctantly, in a currency war with the Fed.” Also, currency wars appear to be a zero sum game, just look at the euro relative to the yen: “with domestic demand running at subdued levels in both Japan and the euro zone, both Japanese and European policymakers have attempted to grow their economies by…trying to sell more abroad than they import…Japan’s search for inflation probably helped to spread deflationary pressures elsewhere (Europe).” Meanwhile, new research suggests the Eurozone is overbanked: “the European banking system has reached a size where its marginal contribution to real economic growth is likely to be nil or negative…the academics wrote that Europe’s banking sector was associated with imbalances such as over-investment in housing and diversion of talent from non-financial sectors. An increasing bias in Europe’s financing structure over the last 15 years towards banking and away from securities markets had bucked the global trend.”
Tea Leaves: Consider Yourself Read
The Wall Street Journal has a pretty good “case-closed” feeling article explaining the drop in bond yields over the last two weeks (alt). “This isn’t about the economy,” seems to be the consensus opinion; here’s what’s happening behind the scenes in bonds: 1) rising demand from pension funds and insurance companies, 2) weak supply of longer-term bonds, 3) low interest rates in Europe and Japan, 4) short-covering, and 5) rebalancing to bonds after a big year in stocks. Meanwhile, “after unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion…’As far as predicting direction up and down, I don’t think they have much value,’ [says one money manager] referring to bond-market models used by forecasters.” Meanwhile, against all odds, “almost all [Goldman Sachs] clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market.” Also, you shouldn’t worry (Level 8).
“On Monday, the Obama administration announced its biggest policy yet to address global warming — a proposed rule to cut carbon-dioxide emissions from the nation’s power plants as much as 30 percent below 2005 levels by 2030…Electric utilities in each state will be given a variety of options for cutting their emissions — using more efficient technology, boosting their use of solar or wind or nuclear power, or even joining regional cap-and-trade systems that require companies to pay to emit carbon-dioxide. There’s a lot at stake here. Coal and natural gas plants were responsible for about 38 percent of all US carbon-dioxide emissions in 2012.”
“Since the financial crisis intensified in 2008, banks have sold more single-family homes than builders have, as they sold homes taken from owners who could not meet their mortgage obligations. The level of bank sales is declining as the economy recovers. But in eight major metropolitan areas, they still sell more than 20 percent of homes that change hands. In only four of the 20 [cities researched] did builders outsell banks.”