Jawboning can only do so much. While there was unanimous support among the ECB board for stating the obvious fact that rates will remain low, there is virtually no support for other methods of easing. With rates at 0.5%, the ECB has two quarter point rate cuts remaining in its quiver if the Germans say it’s okay. While all of this yapping was going on European stocks surged, but today Europhoria has subsided with stocks giving back most of those gains as our handy chart illustrates.
In the last edition of Around the Globe, we touched upon how the economy is creating jobs at less than half the pace necessary. Today, we will discuss quality. While the headline unemployment rate remains at 7.6%, the underemployment rate in our chart shows us the true state of the labor market. Worse, the rate actually rose .3 last month. Workers continue to take jobs that neither take advantage of their skills nor their available work time. If the Fed is really predicating its money printing initiatives on the health of the labor market, then it would be considering extending the duration or increasing the intensity of QE3.
Eurocrats are very optimistic about the second half of the year and have been hyping the end of the European recession since November. Of course, the end has been pushed back several times by now, and it appears as if another delay is on the horizon. Germany accounts for over a quarter of the Eurozone’s GDP. If Germany does not grow, then who will buy all of those Eurozone goods? Chinese demand has been slackening for quite some time and U.S. demand is stable. The Eurozone economy has been struggling to cease contracting. The latest PMIs show that it has gotten very close to stabilizing, but German weakness points to continued contraction.
The Spanish banking crisis is far from finished. Cheap ECB cash has permitted Spanish banks to roll over non performing loans masking the true extent of the disaster as we explained in the June 30 edition of Around the Globe. Moreover, our handy chart illustrates that Spanish property prices are not finished correcting. The poor health of the Spanish banks is just a part of the larger European crisis unfolding. Netherlands, Belgium, the U.K. and France all have overleveraged banks and overheating property markets.
Chinese lending rates have subsided since late June’s mild panic, but the Chinese financial system remains short on cash. As a result, weak companies are beginning to fail. The pace of these failures will pick up in the coming months, as the government’s avowed policy is to allow firms within certain industries to fail in order to reduce overcapacity. The Chinese government believes that it is engineering a soft landing, but there is no such thing as a gentle end to a credit bubble.