Sunday, June 20, 2010

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Political and Economic Developments
UK Jobless Claims dipped 30.9K in May taking the Unemployed to 4.6% from a peak at 5.0% in January (ILO 7.9%). Nevertheless Retail Sales are holding up well, +3.4% Y/Y excluding petrol despite Average Earnings excluding bonuses running at only +1.9% Y/Y. Sentiment remains subdued though as the British come to terms with the massive government spending cuts they will face. Mortgage Approvals remain very subdued, 51K in May, and M4 Money Supply growth at just 2.8% Y/Y, its lowest since 1993 and a fraction of the 10.0% average rate of the last 15 years – proof of the accelerated deleveraging going on in the financial sector.
EU27 leaders held a crisis summit in Brussels yesterday, vowing to do everything to restore confidence, promising to publish next month the results of ‘stress tests’ on the region’s 25 biggest banks - though a German finance ministry spokesman promptly said that only if the banks involved wanted to. This is Germany’s Achilles heel. While the ZEW Assessment of the Current Situation climbed to –7.9 from a low at –92.8 a year ago on strong exports (helped by a weaker Euro), plus declining unemployment, its savings banks and many of the biggest lenders’ balance sheets are probably shot to pieces. Likewise Spanish Cajas where souring loans to the construction sector are unlikely to improve in the near future. This is why overnight deposits at the ECB have been running at about €360 billion: no one knows which ones are sound, whatever their size; the odd ‘stress test’, flawed or not, will not help.

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