Eurozone PMI came in better than expected this morning, but the region has become a story of two economies. While the core continues to show robust growth (primarily Germany) the periphery continues to struggle:
Chris Williamson, Chief Economist at Markit said: “An improvement in the PMI for the first time in three months provides much needed reassurance that manufacturing remains an important driver of the
euro area recovery. The final manufacturing PMI data came in stronger than the earlier flash estimate,
suggesting that growth picked up at the start of the fourth quarter, boosted by rising export sales.
“However, it is clear that the recovery has moved down a gear. The pace of expansion has eased markedly
from the surging near double-digit annual pace seen earlier in the year to a more modest 3%–4%.
“Despite the overall improvement, national divergences will continue to raise tensions for policymaking. Although Greece was the only country to see manufacturing output decline, production continued to barely rise in the Netherlands, Ireland and Spain, contrasting with strong growth in Germany, France and Italy.”
Although equity markets rallied in Europe today the credit markets remain on edge as yields and CDS spreads continued to hit highs:
“Today’s Markit Eurozone PMI continued the trend, the 54.6 October reading well up on the 54.1 flash estimate. As usual, the core eurozone countries drove the expansion but the dichotomy between core and peripheral countries was less distinct. Spain was back above the 50 neutral mark and even Ireland was expanding again.
However, the performance of Ireland’s sovereign spreads didn’t reflect this good news. The country’s spreads hit a record wide level of 530bp today as the problems for the government piled up. The negative sentiment created by a weekend article in the Irish Independent was compounded today by two unrelated pieces of news. Allied Irish Bank (AIB) announced that it had failed to sell its UK operations, meaning that the government’s preference shares could be converted into ordinary shares. Along with a proposed rights issue, this could take the government’s share to 92% if asset sales aren’t achieved. To make matters worse for the government, one of its Fianna Fail TDs announced he was resigning his seat. This leaves Brian Cowen’s administration with a very slim majority – a delicate situation given the upcoming budget vote. And all of this in a sovereign market uneasy about the EU restructuring mechanism announced last week. The Markit iTraxx SovX Western Europe was over 160bp earlier in the day before recovering in the afternoon.”
I am still having difficulty seeing how this problem doesn’t require real resolution at some point. It’s clear that austerity is simply not working. The markets in Europe are confident that the ECB can simply bail everyone out. It’s really no different here in the states. After all, the Fed has vowed to crank the printing press up if there are any signs of economic weakness. But pure common sense tells me this situation can’t last forever. At some point structural problems need to be dealt with.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.