Another night of European PMI data and unfortunately, but not unexpectedly, it wasn’t good news:
The downturn in the eurozone’s private sector is becoming entrenched, business surveys showed on Thursday, as falling new orders and employment levels dent confidence.
June is the fifth consecutive month activity across the 17-nation bloc has declined, dragging down heavyweights Germany and France and likely increasing calls for the European Central Bank to take action to support the economy.
For more detail, a highlight of the indexes is below. As you can see the recession looks to be baking-in and the slowdown has made its way to Germany:
Falling business activity in June rounds off worst quarter for three years
Flash Eurozone PMI Composite Output Index(1) at 46.0, unchanged from May’s 35-month low.
Flash Eurozone Services PMI Activity Index(2) at 46.8 (46.7 in May). 2-month high.
Flash Eurozone Manufacturing PMI (3) at 44.8 (45.1 in May). 36-month low.
Flash Eurozone Manufacturing PMI Output Index(4) at 44.4 (44.6 in May). 37-month low.
The Markit Eurozone PMI® Composite Output Index was unchanged at 46.0 in June, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index therefore signalled that the private sector economy shrank at a rate unchanged on May – which had seen the steepest contraction since June 2009.
With the exception of a marginal increase in January, the survey has recorded continual contraction since last September, with the rate of decline having gathered significant momentum in the second quarter. The second quarter has seen the steepest downturn for three years.
Manufacturers reported the steepest drop in output since May 2009, with production falling for the fourth successive month. Service providers reported a more modest downturn, with the rate of decline easing marginally on May. Services nevertheless suffered the third-largest drop in activity since July 2009. Services activity has fallen in nine of the past ten months.
By country, output fell in Germany for the second month running, dropping at the fastest rate in three years. Marginal growth in services was offset by manufacturing output falling at a rate only slightly below the near three-year record seen in May.
Output fell for the fourth successive month in France, though the rate of decline eased since May – which had seen the fastest downturn since April 2009. Manufacturing output and services activity both fell, albeit at reduced rates.
Steepest drop in German private sector output for three years. Euro crisis leads to survey-record monthly fall in service providers’ business outlook.
Flash Germany Composite Output Index(1) at 48.5 (49.3 in May), 36-month low.
Flash Germany Services Activity Index(2) at 50.3 (51.8 in May), 7-month low.
Flash Germany Manufacturing PMI(3) at 44.7 (45.2 in May), 36-month low.
Flash Germany Manufacturing Output Index(4) at 44.9 (44.6 in May), 2-month high.
Adjusted for seasonal factors, the Markit Flash Germany Composite Output Index dropped from 49.3 in May to 48.5 in June, its lowest level for three years. The latest reading was below the 50.0 no-change value for the second month running, but pointed to only a moderate overall decline in German private sector output. Reduced business activity reflected a marked fall in manufacturing production in June. Meanwhile, service sector activity was close to stagnation during the latest survey period, which represented the weakest down turn since November 2011.
Rate of decline in French private sector output eases in June
Flash France Composite Output Index(1) rises to 46.7 (44.6 in May), 3-month high
Flash France Services Activity Index(2) climbs to 47.3 (45.1 in May), 3-month high
Flash France Manufacturing PMI(3) rises to 45.3 (44.7 in May), 2-month high
Flash France Manufacturing Output Index(4) increases to 45.2 (43.6 in May), 2-month high
Latest Flash PMI data showed an easing in the rate of contraction of French private sector output during June. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, posted 46.7, up from 44.6, its highest level since March. That said, the latest fall in output extended the current period of decline to four months.
Slower falls in activity were recorded in both the manufacturing and service sectors during June. This mirrored similar moderations in the respective rates of decline in new business. Panellists indicated that clients remained hesitant in committing to new contracts amid an uncertain economic climate, although some respondents noted greater numbers of client enquiries and sales of new products.
Lower new business allowed firms to dedicate resources to the clearance of existing workloads. Consequently, outstanding business continued to fall in June, albeit at the weakest rate in three months. Service providers signalled a slower decrease in backlogs, but manufacturers indicated the fastest reduction in just over three years.
Employment in the French private sector declined further in June, with the pace of job shedding accelerating to the sharpest since January 2010
Overnight we also saw the preliminary results of the Spanish banking audit. The estimate is that under a “stressed” scenario, in which GDP fell by 4% and house prices fell by 20% this year before slowly improving, the banking system would need between €51bn and €62bn. Those numbers are nearly double an IMF estimate from June but under the €100bn that is supposedly available via the European stability mechanisms.
These audits have a tendency to underestimate the downside risks but there is a large €38bn buffer. It must be noted, however, that the Bank of Spain stated this month that there were already €152.74 bn of loans more than 3 months overdue as of April. A final audit is due in September, but Spain is expected to use the audit as the basis for a request for assistance this week. In the meantime the ECB is also believed to be looking at relaxing collateral rules for Spanish banks to allow them to use lower rated MBS for ECB liquidity. Ye old cash for coconuts. Reuters also reports that the ECB is looking to ignore CRA’s rating of European sovereign bonds instead using its own internal evaluations.
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Spain auctioned €2.2 billion of 2,3 and 5 yr bonds overnight which was €200m above the target. 5yr bonds went at a record yield of 6.072%, compared with 4.96% last month. Yields have fallen slightly since the auction but remain highly elevated.
While Spain is looking to use the ESM, Germany was attempting to ratify it:
Germany’s opposition political parties indicated they would vote in favor of a European Union fiscal pact and permanent financial bailout fund, clearing the way for parliament’s ratification of the package by the end of this month and strengthening Chancellor Angela Merkel’s hand in moving the bloc toward a political union.
Merkel’s government and representatives of the opposition parties have been negotiating for weeks to reach a compromise that would ensure parliamentary approval of the fiscal pact, which enforces budget discipline in the euro zone, and the European Stabilisation Mechanism, a permanent bailout fund scheduled to go into effect on July 1. Both measures are aimed at resolving Europe’s sovereign debt crisis.
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The pact–formally called the Treaty on Stability, Coordination and Governance–institutes national budget requirements and penalties for member states. It was signed by all but two countries in the European Union in March, but must be ratified by national governments.
The German government is scheduled to meet with representatives from the German states Sunday to seek their support for the measures, which is also necessary for ratification. Mr. Kauder said he expected to reach agreement with the states as well.
In return for their support, Germany’s Social Democrats (SPD) and the Green Party, which make up much of the opposition, demanded that the government back a European tax on financial transactions and fund measures to boost weak economic and job growth.
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Under the agreement the Germany will back further infrastructure spending including the use of the unspent European Union structural funds, increased lending capacity of the European Investment Bank and the use “project bonds”. This is quite a concession for the Merkel government given their hard line, but Eurobonds are still a no go and it must be remembered that this is an agreement based on the ratification of the fiscal compact. In terms of immediate help for the sagging European economy, this could hardly be described as “shovel ready” stimulus.
So austerity is dead, long live austerity!
The German parliament was expected to vote on June 29, but the German constitutional court has stated that it could need up to 3 weeks to decide on the legality of the ESM. It therefore appears that at this point any request by Spain will be met by the EFSF only. Luckily the Cypriots seemed to be hedging their bets with the Russians.
Rajoy, Merkel, Monti and Hollande have much to discuss when they met in Rome later today.
