Positions in Europe: Long Germany (EWG); Short Spain (EWP)
Below we show a table of European Manufacturing PMI according to Markit’s survey. The key take-away that we’ve been noting over the last months is that both inflation and the risk of contagion is eating into both the Manufacturing and Services PMI figures across the continent. In fact, the Eurozone aggregate Manufacturing figure for June is down for the third straight month.
Other data released today shows that Eurozone unemployment remains sticky, at 9.9% in May, unchanged from April. We continue to highlight the longer term tail headwinds of unemployment in Spain (20.9%); Greece (16.2%) and Ireland (14.2%), in particular. [For more, see our post from 5/20 titled The Push and Pull of Europe’s Borders and Demographics].
Finally, Italy’s Cabinet late yesterday passed legislation to push through €47 Billion in deficit-cutting measures by 2014. This is a first step toward balancing the budget in the coming years as PM Berlusconi’s credibility to govern remains in check. Interesting, some €40 Billion of the plan is back-loaded to 2013 and 2014, a threat as sovereign debt contagion fears remain front and center. From a deficit perspective, Italy is in a better position than its peripheral neighbors, at -4.6% of GDP in 2010 (and -7.7% of GDP in Q1 2011), however its debt remains the second highest in Europe (after Greece) at 119% of GDP in 2010.
The Cabinet also approved measures to overhaul the tax system to combat tax evasion. A final vote on the package by the legislature is expected before the August recess.
The EUR-USD continues to hold up in our trade range of $1.42 to $1.45, a band we expect will hold as Troika (EU, ECB, IMF) is prepared to fund bailout packages and debt concessions to peripheral nations at all costs. Big brother backstop is a force we’ll be continuing to manage risk around.