The Euro zone's GDP came out and made for dismal reading. It should be remembered this is yesterday's news, and there are "green shoots" in Europe as well that we will comment on in a moment. But the headline numbers were truly bad, and Germany's number was shocking. Q1 GDP was off 3.8% in Germany, which would be a 15% annual rate of decline! Germany is powered by exports — some 40% of all activity — so this is quite a comment on the state of world trade. All of the Euro zone showed a quarterly decline of 2.5% for Q1 compared to Q4, and a negative 4.6% compared to one year ago. Both are the steepest rates of decline since statistics started being kept in 1995.
As I have said in prior letters, the GDP reports are old news. The more current news is the German "IFO" index of business confidence has turned to the better, and a broad Euro zone purchasing managers' index is pointing to a marked deceleration in the pace of economic contraction. It could well be that the worst is over, but, as in the US, the news isn't good yet, but getting "less bad."
We had an in-line Consumer Price Report Friday in the U.S., when the headline number came in unchanged and most were looking for a decline of 0.1%. The New York State Empire Index — a measure of production — surprised us all with a slightly negative reading of -4.55% when expectations were for a much larger slump of -12%. This compares favorably with last month's number of -14.7%, and, while still negative, it is clearly "less bad." Industrial production was off 0.5%, but Tony Crescenzi of Miller Tabak and RealMoney.comreminds us that the last five months have averaged -1.7%, so while not good yet, this is clearly in the category of "less bad." This is also in stark contrast to the worst reading for Industrial Production in this cycle which was -3.8% in March. What holds hope for the future is that it is clear in some industries that production is below demand (so inventories are being liquidated). The US auto industry, for example and for obvious reasons, has been producing fewer cars than final demand calls for, and that will eventually end. Capacity utilization was last week's final economic stat (this week has far fewer numbers to digest), and it is still hovering near an all-time low of 69.1. March's number was 69.4. Along with high unemployment, a low capacity utilization number makes me think the threat of inflation is not on our doorstep yet.
Despite it all, consumer sentiment continues to improve, albeit at a slow pace. The Michigan Consumer Sentiment survey inched up to 67.9 in April from 65.1 in March, but it did inch up. Everybody's favorite Uncle, Ben Bernanke, said on Friday that the number of participants in the TALF program is growing, and he expects the June tranche to be larger than what we have seen so far. That would be wonderful news.
FBR figures that over $28 billion has been raised in the capital markets since the window for offerings was opened. I feel that the window is closing and some of the firepower on the sidelines has been spent. We rallied over 35% from the March lows on the tide of less bad news. I think we have to cross over to actual good news for another leg upward to have a chance.
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