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Tuesday July 29, 2008 - 12:02:24 GMT
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Forex Blog - European Market Update: Economic Data Continues to Yield Multi-Year Highs and Lows



·*** ECONOMIC DATA ***

·FR July Consumer Confidence: -48 v -47e

·FR June Producer Prices: MM 0.7% v 0.8%e || Y/Y 7.3% v 7.4%e

·FR June Housing Starts: -28.2% v -21.6% prior

·FR June Housing Permits: -15. 3% v -19.9% prior

·GE July Saxony CPI: M/M 0.6% v 0.3% prior || Y/Y 3.6% v 3.4% prior

·GE July Brandenburg CPI: M/M 0.5% v 0.3% prior || Y/Y 3.2% v 3.4% prior

·GE July Hesse CPI: M/M 0.5% v 0.3% prior || Y/Y 3.7% v 3.8% prior

·SW June Retail Sales: M/M 1.8% v 0.0%e || Y/Y 3.3% v 0.6%e

·NV July Consumer Confidence: -31 v -21e

·NV July Business Confidence: 2.4 v 3.0e

·SP May Housing Permits: M/M - 27.7% v 19.5% prior || Y/Y -58.2% v -41.3% prior

·IT June Hourly Wages: M/M 0.3% v 0.1%e || Y/Y 3.6% v 3.3%e

·SZ June UBS Consumption Indicator: 2.246 v 1.948 prior || Prior revised form 1.910 to 1.948

·UK June Final M4 Money Supply: M/M 1.8% v 2.0% prior || Y/Y 11.4% v 11.5% prior

·UK June Final M4 Sterling Lending: £46.1Bv £45.9B prior

·UK June Net Consumer Credit: £900M v £1.0Be || Prior revised form £1.4B to £1.3B

·UK June Net Lending: £3.1B v £3.7B || Prior revised from £4.1B to £3.8B

·UK June Mortgage Approvals: 36K v 37Ke || Prior revised from 42K to 41K

·UK July CBI Distributive Trades Sales Volume Balance: -36% v -9% prior

·UK July CBI Distributive Trades Expected Sales Balance: -32% v -7% prior

·*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***

·In equity news overnight, Atos Origin [ATO.FR] reported 1H net income of €125M, well above the €60M consensus, and revenue of €2.86B, in line with forecasts. The company guided FY08 revenue growth of “over 5%”. The company had previously guided revenue growth of “over 4%”. Akza Nobel [AKZA.NV] reported Q2 net income of €184M, well below the €242M consensus. Revenue came in at €3.87B, above the €3.78B. Akza expects FY08 EBITDA to come in near FY07 levels, and noted that they see weaker economic conditions in some mature markets. SAP [SAP. GE] reported Q2 net income of €408M, roughly in line with the €412M consensus, and revenue of €2.86B, in line with the €2.82B consensus. Software sales were €898M, up from the €716M seen in the comparable quarter a year ago. The company guided FY08 revenue at the upper end of the +24%- 27% range, and FY08 operating margin at the upper end of the 28.5%-29% range. Alcatel-Lucent [ALU.FP] announced overnight that the company's CEO plans to step down. Patricia Russo will remain with the company until a replacement CEO is found. Furthermore the company plans to consolidate its board. Chariman Serge Tchuruk plans to step down. In related news Alcatel reported Q2 results. Revenue was in line with consensus estimates at €4.1B. Alcatel reported an adjusted net loss of €222M, below the loss of €135M expected. The company guided a 2%-5% decline in FY08 revenue at constant currencies. FY08 revenue guidance implies €16.9B-€17.4B against the €17.3B consensus. Valeo [FR.FR] reported Q2 net income of €57M, up form €46M a year ago, and revenue of €2.44B, roughly in line with the €2.49B consensus. Gross margins rose to 16.7% from 15.9% in the prior quarter. The company expects tougher operating conditions in 2H, but said that it will take steps to ensure profit growth in 2008. British Petroleum [BP.UK] reports Q2 net profit (ex-items) of $8.63B, well above the $7.84B consensus. Pretax rose to $14.7B from $10.7B a year ago, while revenue rose to $110.9B, beating the sole estimate of $88.2B. BP reported Q2 production 3.83M boe/day relatively flat from last year's level. Gas Natural [GAS.SP] reported Q2 net income of €226.9M, up from the €206M a year ago. EBITDA rose to €571.3M from €498M a year ago, while revenue rose to €3.09B from €2. 25B.
Santander [SAN.SP] reported Q2 net income of €2.25B, just below the €2. 35B consensus. Lending income rose to €4.46B from €3.91B a year ago, while fee income rose slightly to €2.06B from €2.02B.

·The newspapers were relatively thin overnight. The Telegraph reported overnight that Exxon (XOM) and Shell [RDSA.UK] have cancelled the planned sale of Infineum; The sale was expected to total $3B.

·OPEC's President said overnight that there is supply balance in the oil market, adding that long-term oil prices may be at $70-$80. The OPEC president said that oil prices at $123/barrel are abnormal, adding that there is no need to cut production.

·In new supply overnight
Italy sold €1.5B in 2.35% 2019 I/L bonds with an average yield of 2.64% and a bid-to-cover of 2.31x. In the UK the DMO sold £2.5B in 5.00% 2018 gilts with an average yield of 5.005% and a bid-to-cover of 2.47x.

·In currencies the risk aversion theme was the initial concern, following Merrill Lynch's announcement of an additional $5.7B write-down in Q3. The USD was little changed, but dealer chatter was focused upon Friday's payroll data. The JPY remained softer as dealers noted $7.0B in Uridashi and Toushin issuances throughout the course of the week. Higher Japanese unemployment data also kept the JPY at bay and within striking distance of the 170-barrier in EUR//JPY cross. The Indian central bank raised its repo rate by 50bps to 9.00%. The central bank was only expected to raise the repo rate by 25bps to 8.75%. Dealers noted that this was third interest rate increase in
India over a two-month period, and speculated that it may curb the Indian economic growth over the coming quarters.

·On the speaker front, the French Institut National de la Statistique et des Études Économiques (INSEE) said overnight that second quarter domestic and foreign industry demand in
France declined. INSEE expects a further decline in the third quarter. INSEE also said that the decline in jobs accelerated, noting that acceleration is also seen continuing into the third quarter. The German BDB Banking Association cuts 2009 GDP outlook to 1.0%-1.5% from 1.8% The German DIHK institute forecasted 2008 export growth of 7%, and 2009 export growth of 6% noting that the strong Euro, along with slowing economic growth are expected to weigh on exports. Despite this the DIHK expects the German trade surplus to reach new highs in 2008, and 2009, speculating that perhaps the UK will overtake the US as the number one destination for German exports. The DIHK also noted that union demands could possibly trigger a wage-price spiral in Germany.

·*** NOTES ***

·Regarding today's data, French consumer confidence declined to its lowest level since the series began in June of 1998. The Y/Y reading on French producer prices rose to its highest level since January of 2000. French housing starts declined to their lowest level since records began in January of 2000. Dutch consumer confidence declined to its lowest level since January of 2004. The y/y reading on Italian hourly wages was the highest since January of 2005.
UK mortgage approvals set a new record low again; records began in April of 1993. The trend over the past few months has been one of multi-year highs and lows on the data front, with sentiment/confidence related data down and out, and inflation-influenced data up and about. Although these are all new highs and lows, in most cases they are only extensions of multi-year highs and lows posted over the past couple of months.

·Following yesterday's quick, broad overview of
Spain, today we will throw a glance at some of the Italian data that has been released since the beginning of the second half, we find that, like Spain, things aren't looking too good. All of the Italian PMI readings have been below 50 indicating a contraction in the manufacturing and services sectors. Although volatile, the y/y reading on April industrial production rose to its highest level since June of 2001 as the result of soaring commodity prices. April retail sales declined to their lowest level since mid-2005 on a y/y basis as consumer sentiment declined. June consumer prices skyrocketed to the highest level in their short record reaching 3.8%, and reaching 4.0% on a harmonized basis. July business confidence declined to its lowest level since January of 2001. Again, as seems to be the case across Europe, we find waning consumer and business sentiment, and soaring inflationary measures in Italy.

·While the data has for some time indicated that the outlook for the Italian economy is bleak, the negative, pessimistic tone heard from European officials on the topic has been more pronounced in July than it has been in quite a long time. The Bank of Italy said in early July that Italian banking profits and revenue may suffer if the credit crunch continues, pointing out that net profit at the time 5 Italian banks declined by 30% y/y during the first quarter. Shortly thereafter the Bank of Italy cut its 2008 GDP forecast to 0.4% from 1.0%, and raised its CPI forecast to 3.8% from 2.6%. The Bank of Italy also boosted its 2009 CPI view, raising the forecast to 2.8% from 2.0%. The Bank of Italy was not alone in its actions as a notable Italian think tank cut its 2008 GDP forecast to 0.4% from 0.5%, and raised its CPI forecast to 3.8% from 3.0%. The think tank cut the 2009 GDP forecast to 0.7% from 1.0%. Still further, the Instituto di Studi e Analisi Econmica (ISAE) cut its 2008 GDP forecast to 0.4% from 0.5%, and revised its 2009 GDP forecast down to 0.7% from 1.2%.

·This was a rather quick observation, but note that the average bid-to-cover on the April 2010 zero-coupon bond issue in Italy was 1.585x, down from the average of 1.653x seen on the December 2009 issue (that is the previous 2-year zero coupon issue). Similarly the average bid-to-cover on the 4.50% August 2018 issue declined to 1.39x from the average of 1.463x on the 4.50% February 2018 issue. On the surface this could mean two things. Either the demand for Italian fixed income instruments has declined due to an increase in, or preference for alternative options, or, the more likely scenario, inflationary expectations are eroding demand for fixed income instruments. Although not surprising, I found this interesting.

·“Each pursues his own theory, little solicitous to correct or improve it by an attention to what is advanced by his opponents.” - Thomas Malthus

 

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