Important developments today:
1. Sovereign debt risk on selected European countries continues to rise
2. Euro-Area consumer confidence surprises to the upside in May
3. U.S. consumer confidence tumbles in June
Sovereign debt risk on selected European countries continues to rise. Spreads on European sovereign credit default swaps (CDS) increased to near record highs on Tuesday, led by Greece and Spain, as the sustainability of the current economic recovery in these countries was being questioned. Concern about the European banking sector also added pressure on the credit markets. The Markit iTrazz-SovX Western Europe Index of CDSs for 16 governments widened by 6.5 basis points (bps) to 165bps, the highest level in three weeks, and approaching the record high of 168.5bps set in early-June. The price of insuring against losses on Greek and Spanish sovereign debt also increased to near records, jumping to 1,101bps and 275bps respectively.
Corporate bond risk increased as well, amid renewed worries about a series of potential defaults or restructurings by troubled euro-zone economies. Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly non-investment credit ratings widened 29bps to 574.5bps. Moreover, the volatile European credit markets triggered another sell-off in the euro today, as the single currency fell to a fresh 9-year low versus the yen and slumped badly against the dollar this morning.
Euro-Area consumer confidence surprises to the upside in May… Consumers across the Euro Zone looked on the brighter side of life amidst the ongoing and intensifying fiscal/debt crisis in the Area, to focus on the fall of the euro and the strong growth in exports that this might bring. The EEC’s measure of consumer confidence inched higher to a reading of (minus) 17.3 in June from (minus) 17.8 in the prior month. And a combined business-consumer index of economic sentiment also improved marginally in June, increasing to 98.7 from 98.4 in May.
Economists had anticipated continued substantial declines for these survey results, against a financial and economic background that is less-than comforting. “This is as good as it gets”, notes Nick Kounis of Fortis Bank Nederland in Amsterdam. “We’ll see a slowdown in growth for the second half of 2010, after what’s likely to be quite a strong second quarter, despite the multiple headwinds facing the economy.”
Source: The Conference Board
…but tumbles in the United States in June. U.S. consumer confidence was sharply eroded in June, according to the latest readings of the Conference Board’s consumer confidence index for June, which plummeted from 62.7 in May to 52.9 in the latest month. In particular, consumers’ expectations of improvements in labor markets deteriorated, with only 16% of June survey respondents expecting more jobs in coming months compared to 20% in May, despite a decrease in the unemployment rate from 9.9% to 9.7% the month and a third consecutive increase in payrolls, albeit running at a slower pace. June’s survey appears to bring into focus U.S. households’ fears that spillovers from the Euro Area crisis could stall the global and domestic recoveries. The deterioration in consumer confidence was evident in the drop in retail spending in May, the first in seven months. And consumer confidence is likely to remain weak until job growth picks up and sustains a generally faster pace.
U.S. average home prices up in April The latest reading of the S&P/Case-Schiller Home Price Index for 20 U.S. cities showed a 0.8% (m/m) increase in the average home price in April, as sales got a boost ahead of the expiration of the federal tax credit on April 30. Indeed in year-over-year terms, property values climbed 3.8% from April 2009, the largest annual gain recorded in home prices since September 2006. But the end of government support threatens to destabilize home prices moving forward; evidence of which has already been seen in the “collapse” of new and existing homes sales for May.
Purchases of new homes plunged to a record low annual pace of just 300,000 in May, while inventories soared from a supply of 5.8 months to 8.4 months (the number of months it would take to deplete stocks at current sales rates). While it is unlikely that home prices will revisit the massive falloff seen in the initial phases of the housing sector crash, it appears that without government support the housing market will struggle to find a new floor over the next months.
Japan spending drops on higher unemployment. Though labor market conditions in Japan had been making slow, steady progress over the first months of 2010, the unemployment rate has increased from a 4.9% trough in February to reach 5.2% as of May (latest data), the third monthly increase in succession. This is likely tied to a slowing of industrial production growth (data also released today shows output falling 0.1% in May (m/m)), as well as a fading of government stimulus measures targeted to households. Still, cash wages are up 1.5% (y/y) in May, the first positive mark during 2010, and the ratio of job-offers-to-applications increased from 0.48 in April to .50 in May—a positive development. Household spending fell 0.7% from May 2009, while retail sales are up 4.2% in the same period.
Household spending was an important driver of growth for the Japanese economy in the first quarter of 2010 and the final of 2009, when consumption contributed 0.6 points and 1.6 points to GDP growth respectively. But a moderation in Japanese export growth (as China’s and East Asia’s import demand has slackened to a degree, combined with only modest gains for the United States and Europe), carries substantial influence on the hiring decision. Japanese export volumes recently eased from extraordinary growth above 50% (saar) during the first quarter of 2010 to 25% as of April.
Among emerging markets:
In East Asia and the Pacific, the Conference Board revised down its leading economic index for China, to report growth of 0.3% in April, a substantial revision from the 1.7% gain reported earlier this month.
In Latin America and the Caribbean, Chile’s industrial output rose 7.4% (m/m) in May, according to the Sofofa Manufacturing Association. In year-over-year terms output was up 2.1% from May 2009.
In Central and Eastern Europe, Lithuania’s consumer confidence improved in June to -35 from -37 in May on expectations of stronger growth in employment.