Europe heading back into recession; OECD leading indicators decline again; Interest rate cut still priced in
NOVEMBER 21, 2011
It's good to be back. Things are unraveling faster than I anticipated. You may recall that I indicated back in December 2010 that among the best shorts of the year would be Eurozone banks, the Canadian dollar, and copper. Of course, these were plays on a failing experiment with a common European currency, with credit market unrest spreading from periphery to core....an associated flight towards the (relative) safety of the greenback....and a Chinese economy that was bound to at least slow. The big plays for 2012 will revolve around a slowing Canadian economy, buffeted by international storms, but ultimately sunk by the domestic factors of a debt-soaked consumer and an ailing property market. This will be the story of the next few years. More on that another time...
For now, the real show is in Europe where the bond markets have flipped the bird to the financial stability fund nonsense. The Eurozone is heading back into recession, and ultimately towards the demise of the EU as we know it. A CIBC report from today highlighted this:
This certainly seems to be the story told by the OECD's composite leading indicators, which continue to show a strong downward trend in most regions of the world:
Of course a Euro-zone recession would suck for Canada....they are our second largest trading partner.
On an unrelated note, there is now some discussion that perhaps the Bank of Canada may consider slashing rates. Gee....where have you heard that before. Let me repeat for the thousandth time what I have been saying now for nearly two years: We are more likely to revisit emergency low interest rates than we are to see a significant round of rate hikes in the next few years. Those who have been calling for a rate hike are completely out of touch with how central bankers think. Those who think any of this will be bullish for Canadian real estate would do well to consider the economic environment that warrants interest rates at such low levels. Credit markets continue to recognize this, as the 3 month overnight interest swap continues to suggest that traders are betting that the next move by the BoC is a cut. They finally get it...
Cheers
Ben
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- canada,
- Europe,
- oecd leading indicators,
- recession
5 Comments
Welcome back Ben,
While it is true that Europe is our second largest trading partner, trade with Europe is miniscule in relation to the U.S. In that vein, the U.S. appears to be showing signs of economic recovery this quarter.
If the U.S. continues to grow out of this funk, would that change your outlook for Canada?
Also, I don't see how lower interest rates can hurt the real estate market. I'm not saying that the current bull market can run indefinitely, but lower rates would certainly permit it to continue - no?
Not sure today's revised print of 2.0 GDP is a very solid sign of renewed growth in the US.
The number to watch is Black Friday sales. Let's see if the US consumer still has an appetite for spending.
@ John in Ottawa:
As I'm sure you realize, the revision you are quoting was for the previous quarter, which is data that is already in the rear view mirror.
Some of the latest economic data on the U.S., including employment stats, are showing signs of life. Personal savings rates in the U.S. have fallen from their post recession highs, to just 3.6% as of September 2011 (down dramatically from 4.1% in August). It appears that American consumers are running as scared as previously and are starting to loosen the purse strings a little.
Other information from the U.S. Department of Commerce (Bureau of Economic Analysis) for September indicates the following:
Private wage and salary disbursements increased $17.9 billion in September, in contrast to a decrease of $9.8 billion in August. Goods-producing industries' payrolls increased $1.6 billion, in contrast to a decrease of $3.5 billion; manufacturing payrolls decreased $1.1 billion, compared with a decrease of $4.3 billion. Services-producing industries' payrolls increased $16.3 billion, in contrast to a decrease of $6.3 billion.
Ignoring Appraiser as best possible, but wanting to remark on an oddly calculated and frequently mis-used stat:
The "savings rate" for some very odd reason includes defaulted debt. Yes, if you are flat broke, spending every penny you have, have maxed out your credit cards, fallen behind and finally defaulted you will show up in the stats as having a strong healthy savings rate.
Go figure!
Yep, a penny defaulted on is a penny earned.