Global Commentary by Scott Minerd, CIO, Guggenheim Partners LLC
Europe’s economy is in disarray and the European Union is not addressing its structural problems. It appears, though, that the situation there will improve as policymakers, and the European Central Bank in particular, continue to buy time.
One of the primary problems in Europe is the legacy that the core, namely France and Germany, is more productive than the periphery. This worsened after the formation of the common currency zone because wages grew faster in the periphery, making those countries even less competitive. This has been self-correcting since 2009, with unit labor costs in the periphery falling, while those in the core have risen. Given current projections, we could see unit labor costs between the periphery and the core converge in the next few years. There is still a chance that Europe’s crisis could become more severe, but regulators are aware of this risk and appear willing to do what is necessary to prevent it. The longer Europe can cruise at minimum speed, the higher the chances become that we will see a favorable outcome.
Economic Data Releases
GDP Misses Estimates, Weakness Seen in the Manufacturing Sector
- First quarter GDP rose 2.5%, weaker than the expected 3.0%. Government spending dropped 4.0%, while personal consumption was up 3.2%.
- Consumer spending rose 0.2% in March after forecasts saw no gain.
- Durable goods orders fell by the most in seven months in March, down 5.7%.
- The Chicago PMI fell in April to 49.0, the first contractionary reading since September 2009.
- University of Michigan consumer confidence in April was revised up to 76.4 in the final estimate, but was still at a three-month low.
- The Conference Board consumer confidence index rebounded to 68.1 in April, after falling to 61.9 in March.
- March pending home sales increased 1.5% after falling last month.
- The S&P/Case-Shiller 20 city home price index rose 9.3% in February from a year earlier, the best gain since 2006.
- Initial jobless claims decreased 16,000 to 339,000 for the week ended April 20th.
Record Jobless Rate in the Eurozone with Deflationary Pressure Accumulating
- The eurozone unemployment rate ticked up to 12.1% in March, a new record high.
- Consumer prices in the eurozone grew at the slowest yearly pace since 2010, with a CPI of just 1.2% in April.
- Eurozone economic confidence in April dropped to the lowest level since December.
- The German IFO business climate index fell for a second consecutive month during April.
- The CPI in Germany plunged 0.5% in April to the lowest level seen since August 2010.
- German retail sales fell for a second consecutive month, down 0.3% in March.
- U.K. first quarter GDP rose a better-than-expected 0.3% after contracting last quarter.
Chart of the Week
Strong Market Sentiment Despite Weak Fundamentals
The yield on the eurozone high yield bond index reached a record low of 5.8% last week, and the spread over the corresponding German government bond yield has fallen to its lowest level since October 2007. Despite bullish sentiments in the eurozone high yield market, the eurozone PMI composite, which typically closely tracks the spread, has remained in contraction for 15 consecutive months. The rising divergence between bond spreads and economic fundamentals in the eurozone may reflect investors’ increasing complacency, which is engendered by global central banks’ accommodative policies.
EUROZONE HIGH YIELD BOND SPREAD* VS. EUROZONE PMI COMPOSITE
Source: Barclays, Haver Analytics, Guggenheim Investments. Data as of 4/25/2013. *Note: The spread is the option-adjusted spread over the benchmark German government bond yields.
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