05-Dec (Standard & Poor’s) — Standard & Poor’s Ratings Services today placed its long-term sovereign ratings on 15 members of the European Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative
implications.

We have also maintained the CreditWatch negative status of our long-term rating on Cyprus and placed its short-term ratings on CreditWatch with negative implications. The ratings on Greece have not been placed on
CreditWatch. The ratings on the eurozone sovereigns are listed below.

Today’s CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole.

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05-Dec (Financial Times) — Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc.

The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days.

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By Mohamed El-Erian
05-Dec (Reuters) — With the European crisis continuing to dominate the news, many people now realize that today’s global economy faces an unusually uncertain outlook. Indeed, Europe’s turmoil is but one of the multiple global re-alignments in play today. What may be less well recognized is the extent to which specific sectors are already changing in a consequential and permanent manner.

This is particularly true for global finance where volatility has increased, liquidity is evaporating, and the role of government is pronounced but inconsistent. This is a sector where the functioning of markets is changing, along with the outlook for institutions. The implications are relevant for both economic growth and jobs.

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05-Dec (Chicago Fed) — Four years ago the U.S. economy entered what developed into the deepest recession since the Great Depression. Two and a half years ago the recovery began. Yet, despite both accommodative monetary policy and fiscal stimulus, the pace of improvement has been agonizingly slow.

…To use an automotive analogy, employment and growth are stuck in neutral.

…The Fed is charged by Congress in the Federal Reserve Act to encourage conditions that foster both maximum employment and price stability. This is what you hear us refer to as the Fed’s “dual mandate.” Given the high unemployment rate and low job growth, I think it is clear that the Fed has fallen short in achieving its goal of maximum employment. I will return to this point shortly. As for the price stability component of our dual mandate, the majority of FOMC participants — including me — judge our objective for overall inflation to average 2 percent over the medium term. With my own view that inflation is likely to run below this rate over the next few years, I believe we run the risk of missing on our inflation objective as well.

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PG View: Chicago Fed’s Evans advocates for further monetary stimulus and above-”target” inflation.

Optimism Initially in Critical Week for Europe

05-Dec (USAGOLD) — Gold has retreated back into the range and the euro firmed on a goodly dose of “hopium,” early in what is widely perceived as a make-or-break week for Europe. Last week, the EU’s Olli Rehn said, “We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union.” The 10-days to come up with a credible plan to save Europe — or at a minimum another kick of the can — concludes with the EU summit on Thursday and Friday.

French President Sarkozy and German Chancellor Merkel got a jump on setting the agenda for the summit, completing a bilateral agreement today that calls for a new treaty that would enshrine fiscal discipline and automatic sanctions. The truth is, the current treaty does require fiscal discipline with debt limited to 60% of GDP. The problem stems from the fact that the provisions within the current treaty were simply ignored for years…including by the French and Germans.

The market also derived some optimism from the announcement by Italy’s new PM Monti that €30bn worth of new austerity measures had been agreed to. The plan is highlighted by a VAT hike and an increase in the pension age. New austerity in Italy in conjunction with the Franco-German move toward a tighter fiscal union may be setting the stage for massive increase in ECB bond buying. European style quantitative easing with the figure reported to be around €1 trillion. Italian yields fell markedly today on these expectations.

The ECB is meeting this week and will announce policy on Thursday. While it would be premature to make any statement on asset purchases before the conclusion of the EU summit, the central bank had been widely expected to cut the refi rate by another 25 bps. However, if the ECB is indeed on the cusp of new quantitative measures, they may opt so save that rate cut bullet for another time.

There has been broad acknowledgement recently that there are no silver bullets for Europe as policymakers walk the fine line of providing some hope, while simultaneously not committing to anything they may regret later. Something that might cost them at the polls down the road. Ahhh, but there’s no way to avoid the pain, as the likes of Greece and perhaps now Italy can attest. Merkel and Sarkozy must realize that they are the ones most likely to foot the bill and therefore probably have the most to lose from the likely political backlash.

Of course, the only solutions that are really being posed involve more debt, moving around the existing debt and expansion of the monetary base. This is all understandably quite tempting because the US successfully forestalled economic calamity by implementation of such measures. All that’s been going on in Europe for the past couple years is the search for a way to do the same thing within the confines of the current treaties. A new treaty may solve that problem, but it ushers in a whole host of new issues that will have to be dealt with down the road. Perhaps Sarkozy’s proposal of monthly EU summits is his acknowledgement of that reality.

• US ISM services index fell to 52.0 in Nov, below market expectations of a rise to 53.5, vs 52.9 Oct.
• US factory goods orders -0.4% in Oct, below market expectations of -0.3%, vs -0.1% Sep.
• Eurozone Reuters Composite PMI (final) 47.0 in Nov, below 47.2 preliminary read. Services also lower at 47.5.
• German Reuters Services PMI (final) 50.3 in Nov, down from 51.4 preliminary read. France and Italy better than expected.
• Eurozone retail sales +0.4% in Oct, better than market expectations of +0.1%, vs positive revised -0.6% in Sep; -0.4% y/y, up from -1.4% y/y in Sep.
• Taiwan CPI eases to 1.0% in Nov, vs 1.3% in Oct.
• Singapore PMI falls to 48.7 in Nov, vs 49.5 in Oct.
• Australia TD-MI inflation gauge -0.1% in Nov.

05-Dec (Reuters) — The leaders of Germany and France met on Monday under intense pressure to agree a plan for imposing budget discipline across the euro zone, as markets rallied in the hope they can produce a sweeping solution to the debt crisis at last.

Markets want French President Nicolas Sarkozy and German Chancellor Angela Merkel to forge a comprehensive proposal in Paris for restoring faith in euro zone nations’ ability to repay their debts, before a European Union summit later this week.

But despite their single nickname of “Merkozy,” the Franco-German duo has yet to produce a single master plan for halting a slide which is threatening the currency union’s survival.

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05-Dec (Financial Times) — Risk assets are consolidating their recent stellar rally, though gains are tentative as traders remain wary of being disappointed this week by eurozone leaders’ response to the region’s debt crisis.

New-found optimism is also being held in check by some soft macroeconomic data, after Germany’s private sector in November registered its first contraction in more than two years and China’s service sector expanded at its slowest in three months.

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The sharp fall in the U.S. unemployment rate, to 8.6 percent in November from 9.0 percent in October, raises a question: Could expiring jobless benefits be having an effect on the number?

The decline in unemployment was driven in part by the disappearance of some 315,000 people from the labor force. If they haven’t looked for work in the past four weeks, they’re not counted as unemployed. But that doesn’t necessarily mean they didn’t want a job. Indeed, the Labor Department estimated that as of November, a seasonally adjusted 6.6 million people considered not in the labor force actually did want work. That number was up 192,000 from October.

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PG View: This is the same scenario I laid out in this morning’s Snapshot.

02-Dec (Freakonomics) — The November unemployment data that came out on Friday has Democrats crowing about the drop in the unemployment rate; yet Republicans are rightly pointing out that much of the drop was due to labor-force withdrawal. Neither party, however, seems to be noticing the most remarkable thing: the continuing, constant and historically high share of unemployment accounted for by the long-term unemployed, around 43 percent.

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02-Dec (The Hill) — Conservatives say they will try to block the International Monetary Fund from bailing out Italy and Spain, which they say could leave U.S. taxpayers with a huge bill.

Republicans on both sides of the Capitol complain that the Obama administration has refused to share details of what Treasury Secretary Timothy Geithner is discussing with European leaders amid reports the IMF could intervene.

Sen. Tom Coburn (R-Okla.) says he is planning legislation directing the U.S. government to veto an expanded role for the fund.

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02-Dec 2 (Reuters) — South Korea’s central bank said on Friday it bought gold in November for the second time this year to diversify its foreign reserves, joining its counterparts in other countries in seeking protection against financial instability and inflation.

Central banks around the world, especially in emerging economies, have accelerated gold purchases in recent months, driving up the total official sector gold purchase in the third quarter by more than double to 148.4 tonnes, according to the World Gold Council.

“We bought the gold as part of our diversification strategy and based on long-term investment considerations,” Lee Jung, an official at the bank’s reserve management group, told reporters.

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02-Dec (USAGOLD) — Gold pushed to a new 2-week high of 1762.70 in early New York trading before settling back into the range. While the biggest market mover remains the situation in Europe, attention turns to US employment every first-Friday. Markets initially rallied on the drop in the unemployment rate in November from 9.0% to 8.6%. More people working and spending their income in a loose monetary environment is a recipe for inflation. However, gains in both gold and stocks were subsequently tempered upon the realization that it was a drop in the labor force participation rate that was the primary catalyst for the decline in the jobless rate. There are still 13.3 million Americans out of work.

The ZeroHedge blog reported shortly after the BLS report that “Not seasonally adjusted people who are “Not In The Labor Force” increased by 576,000 in one month.” That figure certainly overshadows the headline net gain of 120,000 jobs. Drilling a little deeper into the data behind this month’s increase: Retail sales saw a large jump, which may be attributable to temporary holiday hires.

Along with upward revisions to payrolls in October and September paint a picture of slow (and arguably steady) job growth, that is not — or perhaps barely — keeping up with increases in the labor force; except in months like November when the labor force contracts markedly. If Congress passes another extension of unemployment benefits, the labor force may swell again, as you must be actively seeking employment in order to collect.

• US nonfarm payrolls +120k in Nov, below market expectations of +125k and well below whisper of +250k; Jobless rate falls to 8.6%. Participation rate falls from 64%.
• Eurozone producer price index ticks lower to 0.2% m/m in Oct, matching expectations, vs 0.3% in Sep; 5.6% y/y.
• Switzerland retail sales -0.2% y/y in Oct, vs big negative revision to -1.4% y/y in Sep.
• UK CIPS construction PMI falls to 52.3 in Nov, vs 53.9 in Oct.
• Indonesia CPI steady at 4.4% y/y in Nov.
• Japan Q3 MoF Capex Survey -9.8% y/y, vs -7.8% in Q2.

02-Dec (CNBC)— Job creation remained weak in the U.S. during November, with just 120,000 new positions created, though the unemployment rate slid to 8.6 percent, a government report showed Friday.

The rate fell from the previous month’s 9.0 percent, a move which in part reflected a drop in those looking for jobs. The participation rate dropped to 64 percent, from 64.2 percent in October, representing 315,000 fewer job-seekers.

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PG View: Slate columnist Matt Yglesias tweeted this shortly after the jobs report came out: “Decreasing unemployment by shrinking the labor force is not exactly winning the future.” He expounds on that sentiment in his MoneyBox blog.

01-Dec (Der Spiegel) — The boost from Wednesday’s coordinated action taken by major central banks around the world was immediate, but short lived. Whereas global stock indexes shot up after the announcement that the European Central Bank (ECB), the US Federal Reserve, the Bank of England and others would make it easier for banks to access US dollars, the euphoria quickly faded on Thursday.

Indeed, even ECB chief Mario Draghi felt compelled to warn against misplaced optimism. In a speech to the European Parliament on Thursday morning, he said that “downside risks to the economic outlook have increased.” In other words, the euro crisis, which has recently morphed into a financial crisis, could soon become an economic crisis.

But Draghi also seemed to hint at a possible way out of the downward spiral, saying that the ECB could be prepared to take additional steps to halt the crisis. First, however, Europe needed to move quickly toward greater economic integration.

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01-Dec (Reuters) — Germany would like European countries to set up special national funds for sovereign debt that is over 60 percent of gross domestic product to help build market confidence in the euro, Finance Minister Wolfgang Schaeuble said on Thursday.

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PG View: This so-called “redemption fund” has been categorized on the ZeroHedge blog as a “Hail Mary” play. As I understand it, the Debt Redemption Fund would be issuing debt to finance the newly issued sovereign debt of countries participating in the fund. It’s nothing more than a shell game.

01-Dec (The Wall Street Journal) — The sight of the world’s largest central banks acting in concert to ease funding strains in global financial markets is about as reassuring as watching an anti-tank ditch being dug. One can’t help wondering what’s coming next and how effective this defense will be.

European Commissioner Olli Rehn has said there are 10 days to save the euro, his eye on the Dec. 9 summit meeting at which we will see whether the euro zone reaches a decision to trade sovereignty for stability.

The first thing to say about the central banks’ action is that it proves that they aren’t going to sit on their hands and watch while the euro zone wrestles with itself. There is still a backstop for, as the central bankers’ parlance has it, “solvent counterparties with adequate collateral.”

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01-Dec (USAGOLD) — Gold remains well bid, but narrowly confined, after posting new 2-week highs overseas. The market euphoria provided by yesterday’s announced coordinated liquidity support for dollar swaps already seems to have been tempered somewhat by the realization that increased liquidity does not resolve any of the underlying fundamental issues. Nonetheless, that reality is unlikely to dissuade policymakers from continuing to pump liquidity and mispriced debt into the system every time there is a hint of duress.

The proliferation of paper — paper in the form of fiat currency and paper in the form of debt — has been a major driving force behind the long-term rally in gold. It would seem that those catalysts aren’t going to be withdrawn any time soon. And in fact, their use is escalating because global markets are now hooked on the “juice,” dependent on ever-larger doses.

• US ISM rose to 52.7 in Nov, above market expectations of 52.0, vs 50.8 in Oct.
• US construction spending +0.8% in Oct, above market expectations of +0.3%, vs +0.2% Sep.
• US initial jobless claims +6k to 402k for the week ended 25-Nov, above mearket expectations of 390k, vs upward revised 396k in previous week.
• UK CIPS manufacturing PMI falls to 47.6 in Nov, better than market expectations of 47.0, vs upward revised 47.8 in Oct. Weakest print in 2+ years.
• Eurozone manufacturing PMI (final) confirmed at 46.4 in Nov, in-line with expectations.
• Switzerland SVME manufacturing PMI falls to 44.8 in Mov, below market expectations, vs 46.9 in Oct.
• Switzerland Q3 GDP (sa) +0.2% q/q; 1.3% y/y, a marked slowing from downward revised 2.2% y/y in Q2.
• South Korea CPI rises to 4.2% y/y in Nov, vs 3.9% y/y in Oct.
• Thailand CPI steady at 4.2% y/y in Nov.
• China HSBC/Markit manufacturing PMI fell to 47.7 Nov, vs 51.0 in Oct: Official manufacturing PMI fell to 49.0 in Nov, vs 50.4 in Oct.

01-Dec (Financial Times) — Chinese manufacturing activity has contracted for the first time in almost three years, adding to fears about the health of the global economy.

The decline comes a day after the US Federal Reserve led a co-ordinated move to ease global liquidity concerns – particularly in Europe – and the Chinese central bank loosened monetary policy.

Chinese government data released on Thursday showed that the official purchasing managers’ index fell to 49 in November from 50.4 in October. The worse than expected fall marked the first decline since February 2009. A reading of less than 50 means the manufacturing sector has contracted.

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PG View: Our suspicion from yesterday proved accurate; that the reserve requirement cut portended bad PMI data.