Hear that snorting sound, the thud of splayed hooves across the cobblestones, overlaid with sweaty palms and a whiff of fear? It’s the herd of wandering investors wondering when they will be saved, again, by central banks. This time, the great hope is that next Wednesday and Thursday in the US, Fed chairman Ben Bernanke and ECB President Mario Draghi will do just that by outlining the steps they will take to steady the US and save Europe. But you have to ask if it will make any difference.
Judging by the poor first reading from the Chinese manufacturing sector yesterday and similar outcomes from Germany, France and the eurozone last night, that help can’t come too quickly. As we outlined in yesterday’s Crikey, China’s growth path is running rough as stockpiles grow of unwanted goods and commodities. Europe remains a basket case, with even Germany getting another dose of the slows. Shares fell overnight and gold rose, while oil hit new highs, despite evidence that demand remains weak and stocks plentiful. It seems those investment banks and other punters are backing having a crack at oil and gold, punting the free money from the central banks before it has been issued. Capitalism at its Ponzi-like best.
Of course, any new money from the central banks won’t help things: the previous rounds of easing have merely helped keep the boats afloat, although they couldn’t stop Greece, Spain, Italy and the eurozone from sliding into another recession, nor the UK. So the faith in the new round of easing seems rather desperate and a bit misplaced.
Markets initially shrugged off the early results of the HSBC Markit survey of Chinese manufacturing, despite it reporting a nasty fall to 47.8 in August, its lowest level since November, from 49.5 in July. The HSBC PMI has been below 50 (the break-even between expansion and contraction) for 10 straight months now. At the current reading, the economy is still growing, but very slowly and if it were an engine, there would be a distinct sound of something not quite right.
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The new export orders sub-index at 44.7 — the worst showing since March 2009 — which surprised analysts from some of their commentaries. The continuing fall in producer prices is now showing up with deflation gripping parts of Chinese industry and factory input prices falling to their lowest level since March 2009. On top of that, as suspected, the flash PMI also showed inventories piling up and “weaker-than-expected sales contributed to a further rise in holdings of finished goods at manufacturers’ plants,” as Markit Economics, which conducted the survey, wrote in a note.
In Europe, private-sector business activity in the 17-nation eurozone contracted for a seventh consecutive month in August but at a marginally slower pace than in July. The Markit preliminary composite purchasing managers’ index for the region rose to 46.6 from a reading of 46.5 in July. The services PMI reading fell to 47.5 from 47.9 in July, while the manufacturing PMI rose to 45.3 from 44.0. The contraction continued across the eurozone, with national indexes for the core countries of Germany and France signaling shrinking output. “Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5% to 0.6% quarter-on-quarter, so it would take a substantial bounce in September to change this outlook,” wroteRob Dobson, Markit’s senior economist.
But there was better news in the US with the early report showing a rise to 51.9 from 51.4 in July, a further sign the US Fed will be reluctant to bring on a further round of easing. New home sales reached a two-year high as well in July. They are now up more than 25% from July of 2011. That’s a solid rebound (from a low base), and another reason the Fed won’t move at its meeting in September, and why Bernanke will be at his circumspect best in his Jackson Hole speech next week. In fact, with the solid July jobs figures and other data since the last Fed meeting, it starting to look as though the US economy is bouncing (slowly). But ahead likes the tax/spending cuts (the so-called Fiscal Cliff) that awaits from January 1.
The Congressional Budget Office and Moody’s warned that the impact of the ending of the tax cuts and the spending cuts planned in the 2011 deal that raised the debt limit, will plunge the US economy into recession in the first half of next year. The Fed can’t stop that happening of the pollies don’t act.
But that’s for next week. Tonight its Europe’s turn to return to the running sore that is Greece. Greek PM Antonis Samaras visits Germany to ask for more time (and money, just 20 or so billion euros more) to do what they have said they will do, for more than two years, restructure and change to meet the terms of two bailouts. So far they have missed every deadline and needed a second, bigger bailout.
German Chancellor Angela Merkel hosted French President Francois Hollande overnight to discuss Greece’s slow stagger towards yet another cliff of its own making. She made it clear Greece had to perform and do as it said it would do, cut spending and raise taxes. Samaras then travels on to Paris tomorrow night, our time, to see Hollande. He will get a sympathetic ear, but that’s all.Samaras used an interview published in Germany’s best-selling Bild newspaper on Wednesday night, our time, to call for more time to carry out policy changes to address his country’s debt woes. He told the paper that granting an extension “doesn’t necessarily mean more money. All we want is a little more air to breathe to get the economy going and increase government revenue”. Sounds easy.
According to newsagency reports, he also told reporters: “We require no additional money. All we want is a little room to breathe, to get the economy going and to increase government revenues. More time does not automatically mean more money.” Samaras even said he would “guarantee personally” that the rescue funds given to Greece would be repaid. (That cliché of “Beware of Greeks bearing gifts” comes to mind.)
And there, floating among all the words in the various reports about the interview and comments was indeed mention of more money, a mere “€20 billion” drifted through some of the reports, not tied to an identified person, just mentioned in passing. Someone is floating a rather large trial balloon, which is laughable seeing Greece having trouble finding the €11.5 billion of spending cuts and higher revenues by mid October to receive €31 billion under the second, €174 billion bailout. Officials from so-called Troika (the IMF, EU and ECB officials) are set to return to Athens early next month to complete a review of the government’s finances. That means eurozone finance ministers will probably not make a decision on Greece’s bailout money until they meet on October 8.
Jean-Claude Juncker, the head of the EU, didn’t win any friends in Athens (but did in Germany) when he emerged from a meeting with Samaras on Wednesday night our time and said (according to news reports) that there would be no leniency for Greece from Brussels. The Telegraph and Guardian reported: “The ball is in the Greeks’ court”, said Juncker, arguing that Greece’s real problem was a ‘credibility crisis’ which could be resolved if it stuck to the bail-out terms and implemented all the planned reforms.”
So another trip to the edge of the cliff for the eurozone, led by a recalcitrant Greece? The ECB and Draghi will have to work wonders to stop the rot if Germany decides it’s not worth another €20 billion to kick the Greek can down the road for another few months. The German Constitutional Court rules on the main EZ bailout fund in three weeks. That could make all of this moot. But Spain and Italy have to be isolated and stabilised because one or both are huge threats and have to be saved, one way or another. Greece could become expendable to the greater good.
But countries can’t leave the eurozone, can they? So can the eurozone find a way to save Italy and especially Spain and leave Greece behind?