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Weekly European Monitor: Changing Tides

-- For specific questions on anything Europe, please contact me at to set up a call.

 

No Current Positions in Europe

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.3% week-over-week vs +1.9% last week. Top performers: Ukraine +7.5%; Greece +4.5%; Czech Republic +3.4%; Denmark +3.2%; Russia (MICEX) +2.0%; UK (FTSE) +1.6%. Bottom performers: Cyprus -9.2%; Spain -5.1%; Italy -3.8%; Hungary -1.4%; Austria -0.9%; Germany -0.1%.
  • FX:  The EUR/USD is down -3.14% week-over-week vs +0.69% last week.  W/W Divergences: RUB/EUR +1.71%; GBP/EUR +1.65%; SEK/EUR +1.56%; NOK/EUR +0.31%; CHF/EUR +0.06%; DKK/EUR -0.05%; PLN/EUR -0.25%; CZK/EUR -0.60%; HUF/EUR -1.22%.
  • Fixed Income:  10YR Yields busted back out for yet another week for the peripheral countries following the market’s optimism after last Friday’s EU Summit.  Week-over-week, Spain’s 10 YR yield saw the biggest move of +67bps to 7.00%. Italy gained +22bps to 6.04% and Portugal gained +5bps to 10.21%. Conversely, French yields fell -28bps to 2.41%, followed by Germany at -20bps to 1.38% and Greece declined -10bps to 25.73%.   

Weekly European Monitor: Changing Tides - aaa. yields

 


Changing Tides:


It was a week ago today that markets rallied hard on the EU Summit “conclusions”. Last week’s note titled “Not in my Lifetime” pointed out just how little substance the three paragraph statement actually contained. In this vein, there’s very little from a policy perspective that needs updating versus last week, because frankly Eurocrats don’t move that fast and as we’ve stated hundreds of times over, there’s a long road ahead for Europe to fix its sovereign and debt imbalances, and still a looming question if the Eurozone can sustain its current 17 member fabric. To the latter point, we expect Eurocrats to throw every kitchen sink and scrap for every available band-aid to keep their jobs and the structure together.

 

As we can see from peripheral yields and CDS spreads, as well as equity performance, there was quite a turn in sentiment this week? In particular, Spain’s 10YR yield is back up to that dangerous 7% mark.  As a continuation of our work, the two main issues right here and now are the scope of the ESM (how it’s directed at bank recapitalizations and the implications if lending is through the sovereign, including with existing EFSF funds) and the scope of a pan-European banking authority (how’s it structured and what banks are included?). Yesterday in the ECB press conference President Mario Draghi gave little color on a European banking authority, including if the ECB would be a backstop for the future facility (see yesterday’s note July ECB Presser YouTubed).

 

Yesterday’s interest rate cuts from the ECB may prove marginally beneficial, yet again it’s a stretch to think that the cuts will have any impact on the existing sovereign and banking imbalances. After all, the LTROs proved highly ineffective. One point to stress, that the market may be looking towards, is any increased lending given the drop in the deposit rate to 0.00%, which is in essence begging banks to do something with their money besides park it for zilch. We expect the credit flow to broadly remain constrained for a protracted period as fundamentals and confidence continue to be bombed out.

 

 

EUR-USD:


Below is an updated EUR/USD price level chart. Our immediate term TRADE and intermediate term TREND support level is $1.22 and resistance is $1.25. Our call is that if $1.22 breaks, look out below! However, we’re not EUR parity folks because we see Eurocrats stepping in to prevent it.

 

Weekly European Monitor: Changing Tides - AAAA. EURO

 


Call Outs:


Germany - Chancellor Merkel’s approval rating rises to 66% = highest level since 2009 after last week’s EU Summit.

 

France - French Finance Minister Pierre Moscovici cut the government's growth forecasts to +0.4% in 2012 (vs the prior forecast of +0.5%) and between +1% and +1.3% for 2013 (versus estimate of +1.7%).

 

Cyprus - Officially becomes the EU president (it rotates every 6 months).

 

France - Needs as much as €43 billion in savings this year and next, the national auditor said, setting the stage for budget cuts by Hollande.

 

Greece - The new government dropped a plan to seek softer terms for its second bailout following warnings that it would be rejected by international lenders. Finance minister Yannis Stournaras said, "The program is off-track and we can't ask for anything from our creditors before we get it back on course."

 

Italy - The government approved €4.5B ($5.58B) in spending cuts for 2012, aimed at slashing the size of Italy's public sector and delayed a new tax increase until after the first half of 2013. The size of the cuts is slightly larger than the €4.2B in cuts the government originally projected for this year. The cuts for 2013 are projected at €10.5B, and €11B for 2014.

 

Ireland - The country returned to the debt markets this week for the first time since its bailout in September 2010. It sold €500 million of 3-month bills, in line with the target, at an average yield of 1.8%.

 

Slovenia - According to Bloomberg, Slovenia is headed toward becoming the 6th Eurozone nation to seek a bailout.

 

Spain - Spanish Economy Minister Luis de Guindos said Madrid will pass additional measures in order to achieve its annual deficit target. (Spain has said that it will cut its deficit to 5.8% of GDP in 2012 from 8.9% last year). Unconfirmed sources say Spain's government is putting finishing touches to an up to €30 billion package of spending cuts and tax hikes to help it meet this year's deficit targets, which could be announced next week.

 

 

Risk Monitor:


Like sovereign yields, sovereign CDS were mixed on the week. Portugal rose +45bps to 853bps, followed by Spain at +16bps to 568bps. Italy gained +6bps to 514bps.  For a second straight week Ireland saw the largest decline in CDS w/w at -49bps to 533bps, followed by France -8bps to 185bps and Germany -4bps to 100bps. 

 

Weekly European Monitor: Changing Tides - aaaa. cds   a

 

Weekly European Monitor: Changing Tides - aaaa. cds   b

 


Data Dump:


Weekly European Monitor: Changing Tides - aaa. pmis

 

Eurozone PMI Composite 46.4 JUN (exp. 46) vs 46 MAY

Eurozone Unemployment Rate 11.1% MAY vs 11% APR

Eurozone PPI 2.3% MAY Y/Y (exp. 2.5%) vs 2.6% APR   [-0.5% MAY M/M vs 0.1% APR]

Eurozone Retail Sales -1.7% JUN Y/Y (exp. -1%) vs -3.4% MAY

 

Germany Industrial Production 0.0% MAY Y/Y (exp. -1.2%) vs -0.6% APR   [1.6% MAY M/M (exp. 0.2%) vs -2.1% APR]

Germany Factor Orders -5.4% MAY Y/Y (exp. -6.0%) vs -3.4% APR

 

UK PPI Input -2.2% JUN M/M (exp. -2.1%) vs -2.6%   [-2.3% JUN Y/Y (exp. -2.2%) vs 0.0% MAY]

UK PPI Output -0.4% JUN M/M (exp. -0.2%) vs -0.2% MAY (fall most since 2008 in June)   [2.3% JUN Y/Y (exp. 2.4%) vs 2.9% MAY]

UK PMI Construction 48.2 JUN (exp. 52.9) vs 54.4 MAY

UK M4 Money Supply -4.1% MAY Y/Y vs -4.0% APR

UK Halifax House Prices -0.5% JUN Y/Y (exp. -0.8%) vs -0.1% MAY

UK New Car Registrations 3.5% JUN Y/Y vs 7.9% MAY

 

Italy Unemployment Rate 10.1% MAY vs 10.2% APR

 

Spain Industrial Output WDA -6.1% MAY Y/Y vs -8.3% APR (falls for the 9th month)

Spanish Registered Unemployment -98.8k in June (est -51.6k) ahead of tourist season

Portugal Industrial Sales -1.3% MAY Y/Y vs -7.0% APR

 

Switzerland CPI -1.2% JUN Y/Y vs -1.1% MAY

Switzerland Retail Sales 6.2% MAY Y/Y vs 0.2% APR

 

Belgium Unemployment Rate 7.2% MAY vs 7.4% APR

Holland CPI 2.5% JUN  Y/Y vs 2.5% MAY

Sweden Service Production 1.9% MAY Y/Y (exp. -0.4%) vs -0.7% APR

Norway Industrial Production 13% MAY Y/Y vs 7.5% APR

Norway Industrial Production Manufacturing 1.7% MAY Y/Y vs 1.9% APR

Norway Credit Indicator Growth 6.7% MAY Y/Y vs 6.7% APR

 

Ireland Consumer Confidence 62.3 JUN vs 61.0 MAY

Ireland Unemployment Rate 14.9% JUN vs 14.7% MAY

Ireland Industrial Production 4.4% MAY Y/Y (exp. 2.8%) vs 2.2% APR

Ireland New Vehicle Licenses 7320 JUN vs 9895 MAY

 


Interest Rate Decisions:


(7/4) Riksbank Interest Rate UNCH at 1.50%

(7/5) BOE Interest Rates UNCH 0.50%

(7/5) BOE Asset Purchase Program increased 50B Pounds to 375B Pounds

(7/5) ECB CUT the main refinancing operations by 25bps to 0.75%; CUT the interest rates on the marginal lending facility by 25bps to 1.50%; and CUT the deposit facility 25bps to 0.00%.

 

 

The Week Ahead:

 

Sunday: Jun. UK Employment Confidence

 

Monday: Aim to present a memorandum of understanding a European bailout of 100B Euros for Spain to the Euro group of Finance Ministers; Eurozone Sentix Investor Confidence; Jun. UK BRC Sales Like-For-Like, RICS House Price Balance; Germany Wholesale Price Index (Jul. 9-12); May Germany Exports, Imports, Current Account, Trade Balance; Jun. France BoF Business Sentiment; Jun. Greece Consumer Price Index

 

Tuesday: Jun. UK NIESR GDP Estimate; May UK Industrial Production, Manufacturing Production, Visible Trade Balance, Trade Balance Non EU, Total Trade Balance; May France Industrial Production, Manufacturing Production; May Italy and Greece Industrial Production

 

Wednesday: Jun. Germany Consumer Price Index – Final; May France Current Account; May Spain House Transactions

 

Thursday: Jun.  Eurozone ECB Monthly Report Published; May Eurozone Industrial Production; Jun. France CPI; Apr. Greece Unemployment Rate

 

Friday: Jun. Spain and Italy CPI – Final

 


Extended Calendar Call-Outs:

 

19 July: ECB governing council meeting

 

18-19 October: Summit of EU Leaders

 

 

Matthew Hedrick

Senior Analyst


ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION

CONCLUSION: The US labor market remains in support of our view that economic growth is slowing domestically. Furthermore, the underlying trends in the data do suggest that President Obama’s odds of securing reelection are potentially lower than meets the eye.

 

Our call for US growth to slow – both directionally and relative to expectations – has been consistent since mid-MAR and this morning’s Payrolls miss is in support of our view. While the headline number of +80k MoM is indeed a sequential acceleration from an upwardly-revised +77k last in MAY, it does register as 20% miss relative to consensus expectations of a +100k gain.

 

While we remain unsure as to why the sell-side continues to attempt to forecast a made-up government number, we are sure that a +84k MoM gain in Private Payrolls (down from an upwardly-revised +105k in MAY) is an apples-to-apples signal that growth in the private sector is tepid at best. As an aside, it remains our longest of long-term views that US growth won’t meaningfully rebound without arousing the animal spirits of the private sector – something that cannot be accomplished amid incessant bouts of central planning. This is counter to the consensus view that our sovereign debt-laden central government is an integral part of the US economy that must not be reigned in – or else…

 

For more on this key topic of domestic fiscal reform, including our updated thoughts on the Debt Ceiling, Fiscal Cliff and the general election, please tune into our 3Q12 Macro Themes Call next Wednesday at 11:00am. Email for more details.

 

Jumping back to the JUN jobs report, the key takeaway from our analysis is that the US labor market remains firmly stuck in the mud, failing to improve or outright deteriorating on a number of key metrics: 

  • Non-Farm Payrolls, Net of Birth-Death Adjustment YoY: -43k from +138k
  • Headline Unemployment Rate SA: flat at 8.2%
  • Hedgeye-Adjusted Unemployment Rate SA (10YR Average Labor Force Participation Rate): flat at 11%
  • Unemployed-to-Working-Age-Population Ratio SA: flat at 41.4%
  • Labor Force Non-Participation Rate SA: flat at 36.2% 

Not that anyone was expecting a major step forward, but it’s clear that the data firmly implies the US labor market remains far worse off than the headline Unemployment Rate (SA) of 8.2% would suggest. You know conditions are not good when an 8.2% Unemployment Rate is being touted as an indicator of “strength” on the incumbent’s campaign trail. Perhaps the populace buys it, perhaps they don’t; we’ll see come NOV 6th. For now, a rigorous analysis of the data (as opposed to overreacting to the headline print) would suggest that Obama’s odds of reelection may be less than indicated by various polls, as well as the latest reading from our Hedgeye Election Indicator.

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION - 1

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION - 2

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION - 3

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION - 4

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION - 5

 

ANALYZING THE JOBS REPORT THROUGH THE LENS OF THE GENERAL ELECTION: JUNE 2012 EDITION - 6

 

All told, the US labor market remains in support of our view that economic growth is slowing domestically. Furthermore, the underlying trends in the data do suggest that President Obama’s odds of securing reelection are potentially lower than meets the eye.

 

Darius Dale

Senior Analyst


EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS

Employment data released by the Bureau of Labor Statistics is a positive for the restaurant industry.  The third consecutive month of disappointing employment growth in Leisure & Hospitality merits caution over the longer term, however.

 

Employment by Age


Employment growth among the 20-24 YOA age cohort, which is important for the QSR industry, was robust in May.  Employment growth among the other age cohorts was also strong, which is broadly encouraging for the industry.  The 20-24 YOA group was the only one shown in the chart below that saw a (marginal) sequential deceleration in employment growth.

 

EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS - Employment by Age

 

Industry Hiring

 

As implied by the Leisure & Hospitality employment data, which leads the narrower food service data by one month, employment growth in the limited- and full-service food industries continued to decelerate in May.  On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 13k, following two months of sequential job losses in the sector.  Looking at the second chart, below, it is clear that hiring in the Leisure & Hospitality industry has slowed over the last three months.  A continuation of this trend will be a negative sign for intermediate- and long-term demand.

 

EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS - restaurant employment

 

EMPLOYMENT DATA: NEAR-TERM POSITIVE FOR RESTAURANT STOCKS - leisure   hospitality

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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CAKE: Not Worth Eating

Love it or hate it, The Cheesecake Factory (CAKE) faces a tough economic climate heading into the second half of 2012. The company reports earnings on July 20 and according to our estimates, CAKE will miss same store sales by the 2% consensus on the Street which currently stands at +1.95%.

 

Interestingly, investors seem to have taken a liking to CAKE as of late. Over the past week, the stock has outperformed the S&P 500 by 3.9% and the Casual Dining Index by 2.25%. A key data point to examine is the ICSC Chain Store Sales Index, which is a compilation of publicly-available sales for retail chain stores.

 

 

CAKE: Not Worth Eating - CAKE SSSjuly20

 

 

Looking at the above chart, you can see the recent decline in the ICSC index comparable to CAKE same store sales. That gap is indicative of the miss we expect of CAKE as most Cheesecake Factory stores are located in malls. The decline in retail could be construed in a way that less people are visiting malls and thus, are visiting Cheesecake Factory less. Nothing is certain until July 20, but we are not optimistic about CAKE’s report


REBAR: Big Trouble In Little China

Since as far back as 2009, everyone from politicians to fund managers have been shouting from proverbial rooftops that growth is slowing in China. It’s no secret that we think growth is slowing across the globe as well – growth implies a sustainable economic model. And with the Chinese rate cut this week, it’s just yet another data point that backs up our case.

 

Chinese construction is what everyone keeps their eye on. When construction slows, commodities like copper and rebar will see their price drop significantly, regardless of what Federal Reserve Chairman Ben Bernanke has up his sleeve. It has to do with supply and demand, no matter how outrageous that might sound these days.

 

 

REBAR: Big Trouble In Little China - CHINA RebarPrices

 

 

The above chart tells us a bit about what’s going on China. Essentially, this is the story:

 

• Real rebar prices continue to decline, suggesting weak Chinese construction activity

• This is negative for construction equipment producers, many of which have become increasing dependent on sales to China (e.g. Komatsu)

• Chinese metal demand has been heavily driven by construction activity.  Weakening could reduce global mine capital investment, impacting equipment suppliers like CAT and Sandvik.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 6, 2012

 

As we look at today’s set up for the S&P 500, the range is 17 points or -0.63% downside to 1359 and 0.62% upside to 1376.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels

 

THE HEDGEYE DAILY OUTLOOK - sector table

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 7/5 NYSE: -371
    • Versus prior  trading day +1773
  • VOLUME: on 7/5 NYSE 684.1
    • Versus prior trading day 466.46
  • VIX:  on 7/5 closed at 17.50
    • Change versus most recent trading day of +5%
    • Year-to-date change of -25.21%
  • SPX PUT/CALL RATIO: as of 7/5 closed at 1.50
    • Versus prior trading day 1.40                     

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning: 38.35
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year yield: as of this morning 1.58%
    • Versus prior trading day 1.60%
  • YIELD CURVE: as of this morning 1.30
    • Versus prior trading day 1.31

 

MACRO DATA POINTS

  • 8:30am: Change in Nonfarm Payrolls, June, est. 100k (prior 69k)
  • 8:30am: Chg in Private Payrolls, June, est. 106k (prev 82k)
  • 8:30am: Unemployment Rate, June, est. 8.2% (prior 8.2%)
  • 8:30am: Avg Hrly Earn M/m All Emp, June, est. 0.2% (prior 0.1%)
  • 8:30am: Avg Weekly Hours All Emps, June, est. 34.4 (prior 34.4)
  • 8:30am: Underemployment Rate (U6), June (prior 14.8%)
  • 10:30am: EIA storage data
  • 11am: Fed to sell $7b-$8b notes in 1/15/2013 to 6/30/2013 range
  • 1pm: Baker Hughes rig count

 

GOVERNMENT

  • President Obama signs transportation, student loan bill
  • House, Senate not in session
  • CFTC holds closed meeting on enforcement matters, 10am

 

WHAT TO WATCH

  • Lagarde: IMF to Cut Growth Outlook as global economy weakens
  • June U.S. jobs gain probably capped worst quarter since 2010
  • Amazon said to plan smartphone to vie with Apple’s iPhone
  • Seagate says 4Q prelim. sales, gross margin missed forecasts
  • Samsung shrs decline after quarterly sales miss ests.
  • Yahoo said to consider Hulu’s Kilar for CEO
  • U.K. producer prices fall most since 2008 as oil costs drop
  • Italian cabinet approves $32b in spending cuts through 2014
  • Buffett, Zuckerberg, Gates to attend Sun Valley conference
  • China GDP, JPMorgan, Air Show, Wimbledon: Wk Ahead July 7-14

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Sugar Bulls Strongest in Six Months on Brazil Rain: Commodities
  • Copper Declines for a Second Day Before U.S. Employment Report
  • Oil Drops Before Payrolls on Concern Economy Failing to Recover
  • Corn Declines as Rally to Nine-Month High Seen Curbing Purchases
  • Gold Declines for a Second Day as Dollar Strength Curbs Demand
  • Sugar Heads for Second Weekly Gain in New York on Brazil Rains
  • Soybean Meal Has Biggest Commodity Advance on Demand From China
  • Indonesia’s Tin Exports to Decline as Low Prices Curb Output
  • Copper-Scrap Discount May Widen as Prices Encourage More Supply
  • BP’s LNG Expansion in Tangguh to Target Japanese, Korean Buyers
  • Japan Atomic Disaster Called ‘Man-Made’ by Investigators: Energy
  • Coffee Crop in India Seen at Record Poised to Boost Exports
  • Gold ETP Assets Advance $2.2 Billion in June, BlackRock Says
  • Copper May Advance 6.7% Near Moving Average: Technical Analysis
  • Fuel Oil Returning to Profit on Iran Supply Cut: Energy Markets
  • Oil May Rise on Signs of Recovery, Inventories, Survey Shows

 

THE HEDGEYE DAILY OUTLOOK - commodity

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - currency

 

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST (HEADLINES FROM BLOOMBERG)

  • Corporate Sukuk Yield Premium Falls on Earnings: Islamic Finance
  • Oil Extends Decline After U.S. Payrolls Count Misses Estimates
  • Axius CEO Kaufmann Indicted in Alleged Scheme to Bribe Brokers
  • Fuel Oil Returning to Profit on Iran Supply Cut: Energy Markets
  • Sugar Bulls Strongest in Six Months on Brazil Rain: Commodities
  • Amazon Said to Plan Smartphone That Would Vie With Apple IPhone
  • Draghi’s Move to Zero Rates Fuels Talk of QE Entering ECB Armory
  • Turkey Agrees With Iraq on Oil Pipeline From Basra, Yildiz Says
  • Made-in-London Scandals Risk City’s Reputation as Finance Center
  • Carry Trade Means 10% Lira Bond Returns Persist: Turkey Credit
  • Middle West Oil Menaces Middle East Dominance: Cutting Research

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team


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