http://globaleconomicanalysis.blogspot.com/2012/12/italy-retail-sales-sharpest-drop-in-17.html

Saturday, December 01, 2012 7:49 PM

Italy Retail Sales Sharpest Drop in 17 Months; Germany Retail Sales Stagnate as Margins Squeezed; Eurozone Retail Sales Drop Sharply

Dismal economic conditions in the eurozone accelerate to the downside as evidenced by falling retail sales. Let's take a look at the Eurozone in aggregate, as well as the three largest countries.

Eurozone Retail Sales Drop Sharply

The Markit Eurozone Retail PMI® shows Eurozone retail sales continue to fall sharply towards end of 2012.

Key points

Sales fall for thirteenth month running in November

German sales remain flat while Italy records another severe fall

Rate of decline in France slows to weakest in five months

Summary of November findings

The Eurozone retail sector remained stuck in a sharp downturn during the penultimate month of 2012, according to Markit’s PMI® data. Sales fell for the thirteenth consecutive month, and remained well below the level seen one year earlier.

The PMI rose slightly in November to 45.8, from October’s 45.3. The latest figure signalled a sharp fall in retail sales compared with one month previously, and the
average for the fourth quarter so far (45.5) is the second-lowest since Q1 2009. Moreover, the trend for 2012 so far (45.6) is the lowest annual average of any year since the survey started in 2004. The previous record low was in 2008 (46.1).

Retail sales across the single currency area fell on an annual basis for the eighteenth month running in November. The rate of decline was sharp, and
stronger than the average over this sequence. Year-on-year sales rose in Germany, but fell at a near-record pace in Italy. The annual rate of decline in France slowed since October, but remained sharp overall.

Comments

Commenting on the retail PMI data, Trevor Balchin, senior economist at Markit and author of the Eurozone Retail PMI, said:

“November’s set of numbers portrayed the weak position the Eurozone’s retailers find themselves in going into the crucial festive season. Actual month-on-month sales continued to fall sharply, resulting in another marked drop compared with one year previously. The data are consistent with consumer spending having declined for five straight quarters come the end of the year.

Italy Retail Sales Sharpest Drop in 17 Months

The Markit Italy Retail PMI® shows sharpest drop in retail sales for seven months.

Key points

PMI falls to lowest since April

High street employment falls at solid rate

Sharper decrease in stock levels

Summary

Italian high street businesses recorded a further sharp decrease in sales in November, leading to more job losses in the sector. There was also a steep drop in purchasing activity as firms made efforts to reduce inventory levels. Meanwhile,
average prices paid for goods for resale rose at a modest rate largely on the back of higher oil-related prices.

The seasonally adjusted Italian Retail Purchasing Managers’ Index® (PMI®) fell to a seven-month low of 35.5 in November, from October’s reading of 37.3, signalling a further sharp month-on-month decrease in total high street spending. The headline
index has posted below the neutral mark of 50.0 continuously since March 2011, and remains below its average over that period.

In line with the sustained downturn in sales, November data showed that high street spending was down sharply compared with the situation one year previously. Furthermore, the annual rate of contraction was the steepest since May’s survey

record. November saw actual sales again fall well short of planned levels, with the overall degree of underachievement the most pronounced for five months.

November data pointed to a further sharp decrease in retailers’ gross margins, which anecdotal evidence suggested was the result of discounted selling prices as well as a fall in sales. The rate of decline was little-changed since the previous
survey period and faster than the historical trend. Also dampening profitability over the month was a rise in average purchase prices. Firms commonly linked the increase in their cost burdens to higher oil-related prices.

Germany Retail Sales Stagnate as Margins Squeezed

The Markit Germany Retail PMI® shows German retail sales continue to stagnate in November.

Key points

Month-on-month sales remain broadly unchanged

Margins squeezed amid sharp rise in wholesale prices

Actual sales underperformed initial targets in November

Summary

At 50.2 in November, the seasonally adjusted Germany Retail PMI was little-changed from 50.3 during October and, by remaining close to the 50.0 no-change value, signalled broadly stagnant month-on-month retail sales in Germany. This has been
the general trend throughout the second half of 2012 to date. Anecdotal evidence from survey respondents largely suggested that subdued consumer confidence was the main factor weighing on retail sales during November.

French retailers report slower fall in sales during November

The Markit France Retail PMI® shows French retailers report slower fall in sales during November.

Key points

Decline in sales eases to weakest in five months

Gross margins fall at slower, albeit still marked, rate

Further reductions in purchasing and stocks

Summary

The contraction in French retail sales continued in November, but at a weaker rate. Both the monthly and annual measures showed less marked declines. Sales once again disappointed relative to previously set plans. Gross margins continued to be squeezed, although the rate of decline moderated.

The headline Retail PMI® posted 48.8 in November, up from 46.0 in October. The latest reading was indicative of a moderate pace of decline that was the weakest since June. Where a decline in sales was recorded, this was generally attributed by panellists to a difficult economic climate, reduced levels of customer footfall and strong competition.

European House of Cards

This entire European house of cards comes crashing down the moment either Germany or France takes a sharp turn to the downside.

I believe both are a given.

As noted on November 29, French Unemployment Highest in 14 Years (And It's Going to Get Much Worse).

Germany will follow (in a major way) the rest of Europe soon enough. It is simply impossible for the German export machine to keep humming with a massive slowdown in Asia, and an outright disaster happening in Greece, Italy, Portugal, and Spain.

Warning bells are flashing loudly, but few hear the call.

Mike "Mish" Shedlock

and Greece stays in focus as attempts to paper over their grand canyon of troubles continues....

http://www.zerohedge.com/news/2012-12-02/yanis-varoufakis-greeces-destruction-and-europes-bogus-growth-pact

Yanis Varoufakis On Greece's Destruction And Europe's Bogus Growth Pact

Submitted by Tyler Durden on 12/02/2012 12:26 -0500

Bond

ETC

European Central Bank

European Union

Gross Domestic Product

International Monetary Fund

Authored by Yanis Varoufakis and originally posted at YanisVaroufakis.com,

On November 27th, 2012, the Eurogroup (comprising the Eurozone’s finance ministers) reached a decision on Greece. Its essence is a guarantee that Greece will remain in the Eurozone (and therefore off the Northern European agenda) for another ten to twelve months; at the very least until the German federal political cycle has seen through the election of a new Bundestag. The repercussions of this short-sighted agreement are grave not only for Greece but for the Eurozone, and indeed the European Union, more broadly.

To accomplish the task of taking Greece off the minds of markets and Northern European electorates for this space of time, Eurogroup ministers came to an agreement with the IMF on how to patch up their conflicting agendas on Greece by means of a joint communiqué according to which Greece’s de-railed Bailout Mk2 is, supposedly, back on track. The basis of their agreement is twofold:

The IMF will pretend it believes Europe’s claims to have rendered Greece’s public debt viable without an OSI (i.e. a haircut in the loans provided to Greece by the troika, aka its European partners), while

Europe will pretend that it can do this without an OSI.[1]

The idea here is that, yet again, the Eurogroup-ECB-IMF alliance is not ready, politically, to reveal the truth to its various constituencies.

The German and Dutch governments (not to mention the Finnish) feel it is impossible to tell their Parliaments, and voters, the terrible truth that some of the money they have put up as part of Bailout Mk1 & Mk2 will not be retrieved.

The IMF cannot admit that it allowed Europe to involve it in a country program that does not fulfill the debt-viability conditions that any IMF program ought to.

The Greek government has invested its survival on misleading its constituency into believing that the tailspin of the Greek macro economy can be arrested under the current arrangements.

And, finally, the ECB is struggling to maintain the illusion that it can remain faithful to its no bailout clause vis-à-vis governments, especially in view of the great challenge awaiting in relation to Spain and Italy.

This holy alliance of subterfuge and double-speak raises a pressing question: What does this new ‘Greek Deal’ mean for the Eurozone in the medium to long run?Before discussing this question, a quick look at the latest ‘Greek Deal’ may be helpful.

The latest ‘Greek Deal’: From OSI to PSI Mk2

Last year’s Greece’s Bailout Mk2 was predicated upon the fantasy that Greek debt would fall, as a percentage of GDP, to 120% by 2020. The specific number, of 120%, was chosen by the IMF as the level that allowed it to remain part of the Greek ‘rescue’ effort (nb. since, unlike the Europeans, the IMF is charter-bound not to provide loans to a country with a runway debt to GDP ratio). What gave ‘credence’ to this target (in the eyes of the unschooled and uninitiated into the laws governing imploding macro-economies) was the substantial haircut that was part and parcel of Bailout Mk2 – the so-called PSI, which imposed ‘voluntarily’ on private bond holders a write down of 54% of Greek government bonds’ face value (on the basis of a swap with longer maturity bonds) which, in present value terms, translated to a 75% haircut. The gist of Bailout Mk2 was: Greece would be back on track on the basis of further austerity, a new 130 billion euro loan for Greece, a 100 billion private sector haircut, and a privatisation drive that would, supposedly, raise 50 billion euros.

As many of us were predicting at the time, screaming our predictions from the rooftops, it took only a few months for the predictions of Bailout Mk2 to reveal themselves as pure fantasy. Less than a year later, Europe had to confess that Greece’s debt to GDP ratio was edging toward 200%. Clearly, the IMF’s Ms Christine Lagarde could no longer pretend that the IMF was faithful to its own charter in remaining part of the Greek ‘program’. And since the German government needs the IMF to remain on board, so as to convince the German conservative side of politics that its ‘Greek strategy’ remains intact, some new ‘deal’ on Greece was necessary that would allow for a re-freshed claim that Greek debt can be pushed down to around 120% by 2020.

To procure this magic number, the powers-that-be had, somehow, to argue that Greece’s GDP will rise by about 50 billion while its debt will fall by 40 billion(nb. for if this were to happen, by 2020, Greece’s debt to GDP ratio would be back to just over 120%, thus keeping the IMF’s board, if not happy at least, pliant). This isprecisely what they announced on 27th November: a boost in GDP by 50 billion and a concomitant reduction in public debt by 40 billion.

The first observation regarding these two numbers is the audacity of the first one. At a time when Greek GDP is shrinking inexorably, and with new austerity measures that amount to fiscal waterboarding of a national economy (new austerity measures of 12 billion euros for 2013 alone), the troika of Greece’s lenders had no compunction in predicting that, somehow, the Greek economy would miraculously achieve a growth rate of, on average, more than 4% annually for at least eight years. And all this with a broken banking sector, no serious investment by the European Investment Bank and, to boot, within a Eurozone that is caught firmly in the clasps of a double-dip recession!

Setting aside this preposterous ‘plan’, let us now turn to the Eurogroup’s other ‘number’: the planned reduction of Greek public debt of 40 billion. How do they intend to effect this? By three means.

First, by cutting 1% off the interest rate Greece pays for the loans given in the context of Bailout Mk1. How much is this going to shave off Greece’s mountain of public debt? Two billion, is the answer. OK, 2 billion gone, 38 to go.

Secondly, by postponing by 15 years the repayment of capital and 10 years the repayment of interest on Bailout Mk2 loans. How much does this reduce Greece’s debt by? If this is a mere re-scheduling, as it seems to be, it does nothing to reduce debt per se. What it does do is to lighten the repayments that the Greek government will have to be making for the period of grace granted. (If the interest rate is, later, pushed below 2% then there will be an element of debt relief, but nothing that makes a substantial difference to the 2020 target.)

Thirdly, by returning to the Greek government the profits made by the ECB on Greek government bonds that the ECB purchased, at a discount, between 2010 and 2011 as part of the failed SMP program (when Mr Trichet’s ECB purchased second hand Greek, Irish and Portuguese bonds in an ill-fated attempt to prevent these states from going under). How much will Greece get from that? Around 7 billion is the answer.

So, by means of an interest rate reduction and an ECB-profit return, 9 billion euros will be shaved off Greece’s debt. This leaves us with 31 to go in order to reach the target of 40 billion announced by the recent Eurogroup decision. Where will these come from? Answer: By means of a debt buyback. Greece will be lent more money by the EFSF with which to buy back its own post-PSI bonds and tear them up (or ‘retire’ them, in the trade’s own language). At the time just before the Eurogroup met, Greek bonds were trading at a price of 35% of their face value. Assuming that Greece was given 16.7 billion euros from the ESFS (in new loans), it could buy back (at that price, 35% of face value) 47.7 billion of its own bonds, in order to retire them. Hey presto, the debt reduction of 31 billion (47.7-16.7) that the Eurogroup announced would be a reality!

Alas, if Greece is given enough cash to buy a significant part of its distressed bonds in the open markets, the increase in demand for these bonds will push up their price to an extent that the debt buy-back will be pointless. Already, the mere rumour of this debt-buyback pushed Greek bond prices well above the 35% level. For this reason, the Eurogroup decided to fix the debt buyback price at the 35% level that was the going rate on the preceding Friday. In other words, the proposed debt buyback will not take place at a free-floating price but at a price set by the Eurogroup which was designed to ignore the increase in demand caused by the… debt buyback itself. To put it differently, the Greek government must now convince bond holders to sell their Greek government bonds to back to the Greek government at prices which are now much lower than those determined by demand and supply (i.e. by ignoring the effect on demand that the EFSF loan to the Greek government has effected).

To gain a perspective on the Greek government’s problem, in convincing the private sector to sell 41.7 billion worth of bonds back to it, at 35% of face value, it is worth nothing that the total value of bonds in the hands of the private sector, globally, is 61.8 billion. Of that, 15.2 billion is held by Greek banks, 8.6 by Greek pension funds and then rest (38 billion) by non-Greek investors, mainly hedge funds. So, the success of the debt buyback program will depend on non-Greek investors. Assuming that Greek banks and pension funds can be made ‘an offer that they cannot refuse’ by the Greek Finance Ministry (nb. already the Greek Finance Minister has told them that it is their… ‘patriotic’ duty to cough up their bonds at the offered price), the Greek government will be short by 23.9 billion (nb. it needs to buy back 47.7 billion, minus the 23.8 held by Greek banks and pension funds, equals 23.9 billion). Will foreign institutions, and hedge funds in particular, ‘play ball’? Or will they hold out for a higher price (perhaps for a 100% redemption even)?

With these thoughts in mind, it is clear that the latest Eurogroup decision will go down in history as the precursor to PSI Mk2. The reader may recall that this Eurogroup summit was supposed to, at the IMF’s behest, usher in the long awaited OSI. But resistance from Germany led to the debt buyback idea which is no more than a disguised new PSI primarily for Greek banks and pension funds. Not only will we fail to achieve the target of 40 billion debt write off but, at once, the already bankrupt Greek banking and pension system be given another major push into the mire of irretrievable bankruptcy; the very same banking (and pension) system which is supposed to provide the financing and backing for a rebound of Greek GDP to the tune of 4% per annum…

What does this all mean for Greece, for the Eurozone, for Europe more broadly?

It is clear that the Eurogroup cannot be serious about either its Greek debt or its Greek GDP targets. The November 2012 decision was merely a pretext for releasing withheld loan tranches to Greece so as to buy another year or so for Europe to patch up, in similar fashion, its crisis elsewhere – in Italy and Spain in particular. Meanwhile Greece has been condemned to another year of misery, failed targets, depressionetc.

The Eurogroup’s underlying ‘logic’ is that, as long as the Samaras government plays well its ‘model prisoner’ role, Greece will be given its OSI after the federal election in Germany is over, in September 2013. Many commentators, even those critical of Europe’s dithering, welcome the implicit acceptance that an OSI is inevitable. I think they are wrong. Take for instance last year’s PSI. What did it prove? It proved that a haircut can be meaningless if badly delayed. While it is true that a haircut of privately held debt in 2010 would have been helpful, Europe’s insistence that there would be no such haircut (and its desperate attempts to fill the gap by huge loans and austerity) ensured that, when the haircut came (with the PSI), it was too little too late. Similarly with the impending OSI: when it comes eventually, after the awful delay effected by the latest Eurogroup’s shoddy ‘Greek Deal’, it too will prove too little too late and too toxic not only for Greece but for Europe as a whole. In short, delaying the delivery of the inevitable medicine turns into poison.

So, what will come of Greece, given the latest Eurogroup ‘decision’? It is my fear, and belief, that the country is becoming a version of Kosovo – a protectorate in which the euro remains the currency, sovereignty is minimal, the population is ruled over by a glorified kleptocracy with strong links with Berlin and, last but not least, a permanent migratory flow is established that sees the young and the skilled move to northern Europe and beyond.

Turning briefly to the significance of the latest ‘Greek Deal’ for the Eurozone as a whole, the omens are particularly troubling for Spain and Italy. First, there is the small matter of the inbuilt domino effect. The reader is reminded that the reduction in Greece’s interest rates (which will be enhanced in the not too distant future further, as the Greek state grows increasingly unable to repay its partners’ loans), will translate into losses by the Spanish and Italian governments (since other troika ‘program’ countries, i.e. Ireland and Portugal, have been spared). The fact that the markets’ expectation of some OMT assistance for Italy and Spain are keeping their bonds’ yields low, for the time being, does not alter the fact that the vicious contagion dynamic is gathering strength.

Beyond this ‘small’ matter, Rome, Madrid and, indeed, Paris must now reckon with a Eurogroup decision that demonstrates how bogus all talk of a Growth Pact really has been (since President Hollande raised it as an issue a few months ago). The fact that the Eurozone’s finance ministers declared, without the slightest hesitation, that substantial growth will come to depression-hit Greece without an iota of a smidgeon of a hint of fresh public investment reveals that Europe is truly blind to what it will take to deal with the recession it faces in aggregate and with the various depressions in its Periphery.

Last but not least, the readiness to sink Greece’s already bankrupt banks further into bankruptcy (by imposing upon them surreptitiously PSI Mk2), rather than implementing the June 2012 Agenda for decoupling the banking crisis from the sovereign debt crisis, is yet another sign that the Eurozone remains on the road to ruin. And, as long as this is the case, the European Union will be increasingly buffeted by the centrifugal forces (especially those emanating from London) that may well cause its evolution into, at best, some form of NAFTA-like trade zone.

[1] OSI stands for ‘Official Sector Initiative’, and is juxtaposed against last year’s PSI (Private Sector Initiative). In essence, PSI was a nominally voluntary, but in reality compulsory, haircut on Greek government debt held by the private sector, whereas OSI refers to a haircut taken by the troika of Greece’s official lenders – the IMF, the ECB and the EU’s member-states. Note however that the IMF is bound by its charter never to concede to a haircut. And given that the ECB is vying for similar ‘superseniority’ status, an OSI is widely expected to hit the taxpayers of EU member-states that have lent money to Greece in the context of Bailout Mk1 and Bailout Mk2.

and...

http://www.ifre.com/greek-buyback-set-for-success/21056171.article

Greek buyback set for success

IFR 1962 1 December to 7 December 2012 | By Alex Chambers, Christopher Spink

Greece’s bond buyback, expected to be unveiled on Monday, has a high chance of success given the large proportion of state-connected holders and the opportunity for a profitable exit for hedge funds that bought at low levels over the summer.

Greece is targeting up to €68bn of bonds by face value as it seeks to cut its total debt by at least €20bn before December 13. It is required to do so in order to secure continuing support from the International Monetary Fund and so allow the disbursement of the latest €34bn tranche of loans under the country’s bailout programme.

The vast proportion of that money, about €24bn, is earmarked for Greece’s beleaguered banks, which remain the largest private-sector holders of Greek government bonds. Those banks are likely to feel that they have little choice in accepting the offer, as to decline would only delay their own recapitalisation. Some may even make a profit (at least in accounting terms) as the bonds are believed to be held at less than 25% of par in some of the banks’ books.

Around €62bn of the bonds in Greece’s sights were issued via March’s private sector involvement (PSI) debt swap exercise and many of the holders are state-related institutions across Europe. They may be pressured by their governments to agree to the buybacks.

Cypriot banks, whose government is currently in talks with the eurozone about its own bailout, have large holdings of Greek bonds. So do Dexia, rescued by France and Belgium, and FMS Wertmanagement, the German state work-out vehicle for Hypo Real Estate.

Roughly €20bn of PSI bonds are in the hands of these Greek and Cypriot banks or other eurozone state-connected institutions.

Going Dutch

The buyback’s dealers, Deutsche Bank and Morgan Stanley, will use a Dutch auction to create competitive price pressure. The buyback starts this week.

Eurozone leaders announced last week that the prices paid on purchases would not be greater than those prevailing at the close of business on November 23 – mostly less than 35 cents on the euro.

“This is probably the last opportunity for a meaningful liquidity event for investors for a long time”

The European Financial Stability Facility is expected to lend Greece €10bn to pay for the buybacks, meaning (if it pays 30–35 cents on the euro) it will be able to repurchase about €30bn of bonds – cutting its debt by the required €20bn in the process.

However, given that only half of the outstanding stock of debt needs to be repurchased for the exercise to be deemed a success, Greece may get away with paying much less than that range.

Strong take-up?

There has been significant trading in the new Greek bonds since the €206bn PSI debt restructuring, under which bondholders received notes from the EFSF, worth 15% of their old par value, and 31.5% of new Greek bonds maturing over 20 years from 2023.

Prices on the restructured debt – the 2% 2023 is the most traded bond – have also risen sharply from 11 cents on the euro in July to just under 35 cents last week. Hedge funds started buying when the odds of a Greek default fell and the odds of a buyback rose, and they may feel now is the time to cash in their winnings.

“This is probably the last opportunity for a meaningful liquidity event for investors for a long time,” said a banker.

Bondholders may also feel that it is better to exit at a profit now, rather than risk being caught up in another forced restructuring down the road.

One large French institution said that it had sold the very liquid EFSF notes and also divested the strip of Greek bonds picked up after March’s debt swap.

No restructuring of the official sector debt is currently on the table, beyond extending these loans’ maturity and reducing their interest rate. But a nominal haircut at the Paris Club is seen as likely at some point, and this might precede further private-sector cuts.

“Par is clearly unachievable as there obviously has to be another write-down for Greece to be sustainable. Fair value is therefore pretty hard to calculate,” said one hedge fund manager, who held Greek-law bonds bailed into the PSI.

“We might easily be sellers simply in order to tidy up our portfolios. Fifteen lines of Greek bonds is a bit distracting,” he said.

A spokesman at FMS confirmed that the institution retained Greek bonds with a nominal value of €2.6bn, but declined to say whether it would accept the buyback. “We would not disclose our strategy in advance,” he said.

The 16 foreign-law bonds with a face value of €6.4bn on which Greece was unable to enforce a retroactive collective action clause, and that were therefore not included in March’s exchange, may also be eligible for the buyback. Several mature over the next few years and trade nearer par.

and.......

http://soberlook.com/2012/12/greek-debt-transformed-into-zero-coupon.html?utm_source=BP_recent

SATURDAY, DECEMBER 1, 2012

Greek debt "transformed into a zero-coupon perpetual bond”

Assuming the Greek bond buyback goes through as expected (see discussion), the bulk of Greek debt will be held in the form of loans by the "official sector": EU/EFSF and IMF. And the maturity of that debt is getting extended dramatically.

Credit Suisse: - Following the buyback, more than 80% of Greece’s debt will be held by the official sector and seems to be in the process of being – for all practical purposes – transformed into a “zero-coupon perpetual bond”. The average maturity on the EU/EFSF loans (which will soon represent 65% of Greek debt) isincreased to 30 years, while there is a ten-year grace period. At the same time, the interest rate on the bilateral loans is below 1%, while interest payments on EFSF loans have been deferred by ten years. This is the third time that euro area countries have restructured the maturities and interest rates of their loans to Greece and they seem comfortable to continue doing so.

Rather than writing down Greek debt principal now, Europe is basically kicking the can (far) down the road. For now this should work well for Greece. The official sector debt not only has "indefinite" maturity, but as Credit Suisse points out, it is also extremely cheap. The new Greek all-in interest expense (including government bonds) as percentage of GDP (event after massive GDP declines) is now below that of the Eurozone as a whole and even below that of the US. Furthermore, the interest on bonds held by the EBK (Eurosystem NCBs) is expected to be returned to Greece.

Source: CS

Whatever the debt to GDP ratio is actually achieved by Greece in the next few years will be irrelevant from the government's standpoint. Rolling of debt or debt servicing will simply not be an issue.

CS: - The debt-to-GDP level is indeed very high and we are expecting it to remain high for many years. Naturally, there would be benefits from a much lower debt-to-GDP level, especially from the perspective of market perception. In reality, it is more debatable whether it would make any difference writing off part of the debt for which Greece pays close to no interest and does not have to repay (for the foreseeable future).

and Japan red lights flashing as well ....

http://globaleconomicanalysis.blogspot.com/2012/11/japan-manufacturing-contracts-at.html

Friday, November 30, 2012 2:31 PM

Japan Manufacturing Contracts at Sharpest Rate for 19 Months; New Orders and Output Plunge; Watch the Yen

In Japan things have gone from Grim to Grimmer. The Markit/JMMA Japan Manufacturing PMI™ shows Japanese manufacturing sector contracts at sharpest rate in 19 months.

Key points:

Output and new orders both continue to decline
Capital goods producers register sharpest falls in production and sales
Inventories and employment cut amid subdued economic outlook

Summary:

Operating conditions in the Japanese manufacturing sector continued to worsen in November. The deterioration was driven by falls in output, new orders and employment as the economic climate remained difficult. Amid an uncertain outlook, manufacturers also cut inventory levels and lowered purchasing activity.

Investment goods producers also recorded the steepest fall in staffing levels during November. With the consumer and intermediate market groups also registering reductions in employment, a net fall in total manufacturing payroll numbers was recorded for the second month in succession.

Reduced sales and a subdued economic outlook were reported to have led to the reduction in staffing levels in the latest survey period. Similar factors led to declines in inventories and purchasing activity over the month. The fall in stocks of raw materials and semi-manufactured goods was the steepest in over a year-and-a-half, while input buying was pared to the steepest degree since April 2011.

Watch Japan's Current Account and the Yen

On November 12, in Japan Plunges Into Deep Recession; GDP Shrinks 3.5% Annualized; Japan Current Account Turns Negative First Time in 30 Years I noted that Japan trade deficit hits record as relations with China poisoned.

Japan Current Account Turns Negative

The trick for Japan is how to finance its national debt, now at a majorly unsustainable 235% of GDP.

Japan was able to do so for years on account of its current account surplus, of which trade is typically the largest component.

You can now kiss that surplus goodbye because Japan Current Account Turns Negative

Bug in Search of Windshield

As my friend John Mauldin suggests, Japan is a bug in search of a windshield. I highly doubt Japan can make it to 2022 or even 2017 before it runs into serious issues.

Actually, Japan has extremely serious issues already, it's just that the market is ignoring them for now. If interest rates rise by a mere 2% or so, interest on the national debt will consume 100% of Japanese tax revenue.

Global imbalances are mounting. I suspect within the next couple of years (if not 2013) Japan will resort to the printing press to finance interest on its national debt and the Japanese central bank will start a major currency war with all its trading partners to force down the value of the yen.

Mike "Mish" Shedlock

Catharsis Ours

Sunday, December 2, 2012