China Manufacturing Disappoints Expansion Expectation, Contracts For Second Month

Following HSBC’s PMI data, China’s official Manufacturing PMI just printed well below economists’ expectations and is now signaling contraction for the second month in a row. Critically the expectation was for a return to expansion at 50.1 but the data came at 49.8 – still marginally higher MoM. Most sub-indices improved modestly from August but of most interest was the fifth month-in-a-row that the employment index dropped. For all the iron-ore-recovery believers, the Inventories of Raw Materials index also jumped by its most in three months as Input Prices also surged for the second month in a row. So contraction confirmed, a CCP in ‘leadership’ turmoil, and a PBOC stymied by inflationary concerns and the need to push through structural reform.


Key Events In The Weeks Ahead

The following is a comprehensive list of key events to watch over the next several weeks – events that could have very significant bearing on how the euro sovereign debt crisis evolves.



End September: Moody’s due to conclude review of Spanish sovereign rating. Moody’s was planning to conclude its review by the end of September with “the size and terms of the banking support package, including the potential size of the government’s liability” being a key driver in the decision. As governments have not made progress fleshing out a direct recapitalisation facility — indeed, have created some ambiguity as to whether it will be non-recourse — there is a distinct risk that Moody’s decides to downgrade Spain. Moody’s currently rates Spain Baa3, the lowest investment grade rating. Also see article on Spain in this issue of Focus Europe.


28/29 September: EU Socialist Leaders Conference. In Brussels.


1 October: September PMI manufacturing survey. Will provide a useful indicator of the situation in manufacturing in the last month of Q3 in ‘non-core’ countries like Italy and Spain. The flash estimate implies weakness in services rather than manufacturing.


2 October: Greece auction. Bills


2 October: Spain conference of regional heads of government. The fiscal negotiations between Madrid and regional governments and the call for early elections in Catalonia (see 25 November entry) have placed renewed market emphasis on the Spanish regions. The two items on the meeting’s agenda are the current economic situation and the future of the EU but reform of the current regional financing system is likely to be discussed.


3 October: September PMI services survey.


4 October: Spain auction. Bonds


4 October: ECB Governing Council meeting, followed by the interest rate announcement and press conference. Another occasion for the ECB to consider the stance on policy, both standard and nonstandard. We expect no rate changes as a refi cut would be hard sell to the Governing Council due to concerns about rising inflation expectations, above all in Germany, following likely OMT.


8 October: ESM Board of Governors meeting. Following the conditional approval of the ESM by the German Constitutional Court, Eurogroup President Juncker called the first meeting of the Board of Governors of the ESM for 8 October. On 27 September the German President ratified the ESM Treaty after euro zone officials issued a statement reaffirming the conditions set out by the German Constitutional Court. The ESM should thus become operational by mid October as countries have two weeks to pay in the first two tranches of paid-in capital, worth EUR32bn in total, supporting EUR200bn of lending commitments.


8-9 October: Eurogroup/ECOFIN finance ministers meetings. Our expectation is that some compromise will be found to bring some relief to Greece. Exit will be avoided. However, based on comments from Eurogroup President Juncker on 14 September the Troika conclusions on Greece are unlikely to be made in the first half of October but “hopefully” not as late as November. This points towards the EU leaders’ summit on 18-19 October as the most likely time for decisions. The October ECOFIN meeting was also when decisions were due to be taken on how to reduce the Irish legacy bank funding costs, for example, through swapping the promissory notes for EFSF bonds. This current sounds too ambitious a timeframe also.


9 October: Annual IMF/World Bank meetings.


9 October: Greece auction. Bills


10 October: Hollande to meet Rajoy. French President Hollande to meet Spanish PM Mariano Rajoy in Paris.


10 October: Italy auction. Bills


11 October: Italy auction. Bonds


16 October: Spain auction. Bills


16 October: Greece auction. Bills


18 October: Spain auction. Bonds


18-19 October: EU leaders’ summit. This is emerging as being the key political date for the EU to conclude the review of the Greek loan programme. Likely to be on the agenda for this meeting are the proposals for a common supervisory regime for banks under the ECB — this will be the basis for a direct bank recapitalisation mechanism in the future and the second and more detailed euro integration roadmap from Van Rompuy, Barroso, Juncker and Draghi.


21 October: Spanish regional elections. The Basque Country and Galicia hold elections.


23 October: Spain auction. Bills


26 October: Italy auction. Bonds


28 October: Finnish municipal elections. Markets will be particularly attuned to the fortunes of the anti-EU True Finns party. In the last municipal elections in 2008, the True Finns party increased its proportion of the vote from 0.9% to 5.4%. Opinion polls this summer have put the party’s support in the 11-16% range. This would be a less substantial swing to the TF compared to the parliamentary elections in April  011 when the proportion of the vote compared to the preceding election increased from 4.1% to 19.1%. In quotes on Bloomberg on 31 August 2012, Finnish PM Katainen tried to allay fears: Rescues “are difficult in all countries, Finland is no exception”. “We’ve taken part in all bailouts and we will continue to act responsibly. We’re looking for ways that don’t increase joint liability, but we do want to resolve the crisis”.


29 October: Italy auction. Bills


30 October: Italy auction. Bonds.


end October (tentative): Cyprus Troika review. The Governor of the Central Bank of Cyprus has stated that the bank aims to bring bailout negotiations with international lenders to a conclusion by the end of October. This is in line with hopes previously expressed by the Cypriot Finance Minister Vassos Shiarly.


4 November: G20 Finance Ministers and Central Bank Governors. Meet in Mexico.


7 November: European Commission Economic Forecasts.


8 November: Spain auction. Bonds.


8 November: ECB Governing Council meeting, followed by the interest rate announcement and press conference.


12/13 November: Eurogroup/ECOFIN finance ministers’ meetings.


13 November: Italy auction. Bills


13 November: Greece auction. Bills


14 November: Italy auction. Bonds.


15 November: Q3 GDP reports. Eurostat will publish the flash estimate of euro area GDP growth for Q3 2012. Our current estimate in -0.3% qoq.


20 November: Spain auction. Bills


21 November: Spain auction. Bonds


22-23 November: EU Leaders’ Summit. Ostensibly to discuss the EU Budget for 2014-2020, but also an occasion to address crisis policies.


25 November: Catalonia regional election. Early elections for the parliament of the autonomous region called by Arturo Mas, head of the Catalan regional government.


27 November: Spain auction. Bills


27 November: Italy auction. Bonds


28 November: Italy auction. Bills


29 November: Italy auction. Bonds


Source: Deutsche Bank

France Unveils A 'Growth-Killer' Budget For 2013

Following closely on the heels of Spain’s budget and banking audit debacle, France prepares to unveil its budget (taxing business, bankers, and beer). The positive spin will be deafening as politicians are already proclaiming ‘realistic and ambitious’ growth targets as getting the country ‘back on the rails’. UnMondeLibre‘s Emmanuel Martin comments “How ironic? The French Presidential candidate who once campaigned with the slogan of ‘growth vs. austerity’ is now, as President, preparing to give the French the biggest taxation shock ever – a growth killer that is.” What matters is the type of path to fiscal responsibility, and, unfortunately, Mr Hollande chose ‘austerity with more taxes and no reform’. With France being a crucial player in the Euro-game, one wonders whether this might actually not mean the end of the Euro sooner.


Via Emmanuel Martin of Un Monde Libre,

France: A Growth-Killer Budget for 2013

How ironic. The French Presidential candidate who once campaigned with the slogan of “growth vs. austerity” is now, as President, preparing to give the French the biggest taxation shock ever – a growth killer that is.


France’s 2013 budget has been unveiled Friday and it is the “most important rigor effort in 30 years” according to… Mr. Hollande himself. Following his predecessor’s defense of the “golden rule”, the socialist President intends to reduce the deficit at 3% next year (vs. 4,5% in 2012) in order not to be “in the hand of markets”.


Of course market investors may be happy with the apparent “seriousness” of the socialist President. Of course Germany may be pleased to see that “Flamby” has finally come back to “reality” after his electoral pledges.


Except that reducing deficits is not the key to France’s problem per se: it depends on how the government performs it. Hence, behind the rhetoric of a “courageous, responsible” budget, or even a “budget of conquest”, the reality is that this budget is essentially based on tax increases (€24bn) – not spending cuts (€10bn). In a country with more than 56% of GDP in public spending and a public debt exploding at now nearly 90% of GDP,  a “responsible” government was expected to initiate a serious effort in terms of reforms to reduce the level of public spending first.


Yet, total tax pressure will rise from 44,9 to 46,3% of GDP whilst government spending will be “stabilized” at 56,3% of GDP. The revenues from income tax should rise by 25% (from €59bn to €73bn). A new income tax bracket is created above €150,000 with a 45% marginal taxation rate, with of course the famous 75% rate for incomes (from work only) above €1Mn. This steeper progressivity is not a good recipe for incentives to invest and create. A group of entrepreneurs called “the pigeon” (the pigeon means someone who pays for everyone – but that bird can also fly) has already planned demonstrations on October 7. Corporate tax revenues should increase by 30% at €52bn (especially from reductions in tax deductions in big companies). One hardly sees how France’s issues of high unemployment (that recently reached 10%) and lack of competitiveness due to high labor – social – costs will be helped by such policy (especially after the government last summer chose to reduce the retirement age to 60 for those who started to work at 18 – which is costly, and increased the national minimum wage).


Today the government maintains that most of the tax effort will be borne by rich households and big companies. This sounds like a “class struggle” vision, even if one now knows that to hit the rich is, in the end, to hit the poor – either because the rich will invest less or elsewhere. But, in fact, it turns out that, according to a Tax Administration Union, 16 million tax households (out of 36 million) will be hurt by income tax increase, given the freezing of the tax schedule. The cap of the tax reduction share per child is reduced from €2,300 to €2,000, which will hurt middle class families who pay income tax. The new taxation of capital gains and savings will penalize poor and middle class savers. Moreover, one measure taken this summer by the government has already reduced the purchasing power of the “workers”: the suppression of the non-taxation of overtime hours.


Government payroll is “frozen” at €80bn – not reduced. Even the budget cut of the “non-essential” Ministry of Culture is small (from €2,54bn to 2,43bn – a mere €110M… difference). Yes, 12,300 jobs will be suppressed in the various government departments. But 11,000 new public jobs will be created, and that’s on top of the nearly 6,800 already created this summer. The rule of non-replacement of retiring civil servants introduced by Mr Sarkozy was suppressed. Even when it is claimed that the government programs will be cut back (but the Prime Minister Jean-Marc Ayrault did not mention any during a TV show Thursday night), it’s hard to see where the €10bn will be found.


A recent NBER study by Alberto Alesina, Carlo Favero and Francesco Giavazzi finds that fiscal adjustments focused on spending are “associated with mild and short-lived recessions, in many cases with no recession at all” whilst “tax-based adjustments” are associated with “prolonged and deep recessions.” It’s high time that France seriously rationalizes its administration (by suppressing layers in its decentralized system, for eg. the Département – a layer of local government) and reduces its public spending. Mr Sarkozy was no doubt a big spender, and under his government debt increased by about 30% (which weakens the criticisms of the opposition today) but the effort to rationalize public spending was launched five years ago with the Revue générale des politiques publiques (a sort of cost-benefit analysis of France’s public policies to reform the government) and it was a good start. This new government seems to have dumped it.


Finally, let’s mention the – usual – optimistic assumption about growth next year. The government started with a 1.2% forecast, and then chose 0.8% for this 2013 budget. But economists predict 0.3%. The difference is not minor as 0,1% equals €1bn. As it’s obvious that such taxation shock will shrink the economy, one can only be stunned by the government growth forecasts for the next years : 2% !


After nearly forty years of budgets in deficit, France’s finally turning towards fiscal responsibility could have sounded like good news. But what matters is the type of path to fiscal responsibility, and, unfortunately, Mr Hollande chose “austerity with more taxes and no reform”. With France being a crucial player in the Euro-game, one wonders whether this might actually not mean the end of the Euro soon.


And Deutsche Bank’s Summary of the State of France:

France: Exhausted model


France has been defying gravity with three quarters in a row of stagnating GDP. However, we expect outright recession in H2 2012, with two quarters of GDP contraction, followed by only subdued recovery. Indeed, domestic demand is faced with two headwinds: wage austerity and fiscal retrenchment, while exports are hit by the slowdown in external demand. France’s economic model since the beginning of monetary union, where productivity gains are channeled to real wages growth and consumer spending, has touched its limits.


In Q1 2012 the share of wages in corporate gross value added climbed to 68.5%, highest level since 1986. Symmetrically, aggregate corporate profitability has fallen back to 13.0%, second lowest since 1986. This suggests that the current bout of wage austerity – real wage growth has been negative since Q4 2010 needs to continue. While it did not collapse, as it did in the periphery, consumer spending no longer is a growth engine in France, where it now stands at only 1.6% above its pre-recession level in 2008, underperforming Germany (+3.8%). We do not expect any reversal of this trend over the forecasting horizon.



Two third of the discretionary fiscal adjustment for 2013 (1.5% of GDP in total) will come from higher taxes. While this is a textbook approach when consolidating amid adverse cyclical conditions, this won’t boost potential GDP in a country where the tax burden stood at 43.7% in 2011 against 39.5% in the Euro area. A significant share of the tax hikes will affect corporations, in particular the removal of full deductibility of interest paid on debt, as well as the limits to the capacity to offset domestic profits with losses in foreign subsidiaries. This will add to the current deterioration in the corporate sector’s financial position, which in turn will exacerbate wage austerity and depress capital expenditure, which so far held up relatively well (the investment ratio of the corporate sector in early 2012 was still nearly 2 points above its long term average).


We consider that the official growth forecast for 2013 (+0.8%) is optimistic. Consequently, in spite of a commendable discretionary effort, we think that France is unlikely to meet its target for the deficit in 2013 at 3.0% of GDP. Looking ahead, the speed of the recovery in 2014 will depend on the government’s capacity to impose structural reforms, notably on the labour market. Official communication hints at such efforts, but very little has been spelt out so far.

3 Time Emmy Award Winning CNN Journalist: Mainstream Media Takes Money from FOREIGN Dictators to Run Flattering Propaganda

 Mainstream Media: Presstitutes for the Rich and PowerfulPainting by Anthony Freda:

If you’ve been paying attention, you know that the American media act as presstitutes for rich and powerful Americans.

But it turns out that the American media will turn “tricks” for foreign johns as well …

Specifically, three time Emmy award winning reporter Amber Lyon was until very recently a respected CNN reporter: 

Lyon was fired from CNN after she refused to stop reporting on her first-hand experience of the systematic torture and murder of peaceful protesters by the government of Bahrain.

Lyon’s special report on Bahrain was scheduled to run on both CNN’s U.S. and international networks, but was pulled after only a limited showing due to pressure from the Bahrainis and their lobbyists.

At the same time that Lyon was risking her life to do on-the-ground reporting in Bahrain, another CNN journalist was filming a paid propaganda piece on how the Bahraini leaders are a bunch of friendly pro-democracy reformers.

That’s right … the Bahraini government paid CNN to do what was literally an infomercial for that brutal regime and pretend it was real journalism.

Lyon says that China and many other foreign, authoritarian regimes also pay CNN and other mainstream networks to run flattering propaganda pieces.



We are grateful for Ms. Lyon’s exposé of this revolting practice … especially because real reporting is treated as terrorism by the American government.

It's No Fun In Iran

Since Mahmoud Ahmadinejad first became President of Iran, in August 2005, the country’s economy has gone from bad to worse. As Steve ‘hyperinflation’ Hanke noted recently, the Iranian economy has, for decades, been cobbled together by religious-bureaucratic regimes that have employed mandates, regulations, price controls, subsidies, a great deal of red tape, and a wide variety of other interventionist devices, in an attempt to achieve their goals. It’s all been kept afloat – barely afloat – by oil revenues. Shortly after Ahmadinejad took power, Iran began to draw the ire of the United States and its allies over a number of issues related to its nuclear ambitions and this ‘loose’ coalition of allies has ratcheted up economic sanctions. These sanctions are starting to have very significant impacts. From the Rial’s greater-than-50% plunge to estimated inflation rates over 70%, the country’s ‘Misery Index’, as noted in Bloomberg’s Chart-of-the-day, has surged massively in recent months. For context, Iran’s Misery score of 106 currently compares to Egypt’s pre-Arab Spring Misery score of around 40! Whether the sanctions’ “bite” will cause the regime to dig their heels in more and/or force the people to openly revolt (or turn ther anger on the sanction-enforcing aggressor?), it truly is no fun in Iran.


Hanke – “Even if sanctions have a massive impact on the economy, they tend to paradoxically do what they are intended not to do, the highest probability scenario in terms of interpreting the misery index in a case where you have sanctions is that as the misery index goes up the regime gets stronger and digs in.”


The Chronology of Sanction against Iran:


Via Cato:


There is no question that the sanctions the “allies” are imposing on Iran are starting to bite, and bite pretty hard. But, will this coercion win the “war?” Probably not. Prof. John Mearsheimer, in his masterpiece, The Tragedy of Great Power Politics, provides more than ample evidence to show that naval blockades and strategic bombing (and I would add financial sanctions) rarely produce their desired results. As Prof. Mearsheimer concludes:


“…the populations of modern states can absorb great amounts of pain without rising up against their governments. There is not a single case in the historical record in which either a blockade or a strategic bombing campaign designed to punish an enemy’s population caused significant public protests against the target government. If anything, it appears that ‘punishment generates more public anger against the attacker than against the target government.'”


Even though the sanctions are causing untold misery in Iran, history suggests that a good dose of skepticism about whether the Iranians will comply with the demands of the “allies” is in order — as Prof. Mearsheimer writes:


“…governing elites are rarely moved to quit a war because their populations are being brutalized. In fact, one could argue that the more punishment that a populations suffers, the more difficult it is for the leaders to quit the war. The basis of this claim, which seems counterintuitive, is that bloody defeat greatly increases the likelihood that after the war is over the people will seek revenge against the leaders who led them down the road to destruction. Thus, those leaders have a powerful incentive to ignore the pain being inflicted on their population and fight to the finish in the hope that they can pull out a victory and save their own skin.”


So, in one sense, the sanctions are working; they are imposing a great deal of misery on Iranians. But, in another sense, they will probably fail — fail to force the mullahs to comply. Perhaps that’s why Russia’s wily foreign minister, Sergey V. Lavrov confidently stated that “Russia is fundamentally against [adopting even more sanctions], since for resolving problems, you have to engage the countries you are having issues with, and not isolate them.”

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