European Deficits Fall Along With Peripheral Yields

Are the days of austerity numbered? Jose Manuel Barroso yesterday remarked that the euro zone could be at the ‘limit’ of its commitment to austerity given the lack of popular support for these programs and the ongoing recession in the periphery.

This admission came just hours after Eurostat, the European statistics body, released details of just how much debt is continuing to rise in European countries which have gone through painful and sustained budget cuts and tax rises. Overall, the Eurozone budget deficit shrank fell to 3.7% in 2012 from 4.2% in 2011 but only as a result of the Germans managing to turn a deficit of 0.8% to a surplus of 0.2%. This apparently took care of 60% of that improvement.

The Periphery Needs Help
The combination of these debt and deficit numbers can only point to sustained needs of the periphery for financial assistance from the core and the ECB for a lot while longer. Does this mean that the desire for austerity should cease? It certainly looks like it is hitting fresh lows in the week that the austerity bible was proved to be formed on the basis of a calculation error within an excel table.

Overnight, China’s manufacturing PMI was shown to be growing at a slower rate than had been originally thought. Q1 growth overall missed expectations and the reading of 50.5 – against a previous of 51.6 and an expected 51.5 – will do nothing to dissuade those of us who think that the Chinese economy is still struggling tremendously to get itself off the mat. There is no need to shout and scream about this figure but worries over the state of the global demand cycle must be taken into account. AUDUSD was your main faller after the release with NZDUSD also lower.

Disappointment on a PMI reading may not be just a Chinese phenomenon, today, with preliminary readings from Germany and France this morning that could easily damage the euro if further sign of a core recession is added to the periphery depression.

EUR
The euro remained supported yesterday with further gains for the peripheral debt markets. Following the dip on the Italian 2 year to a record low of 1.267% we saw the Spanish 10 year push its yields below 4.5% for the first time since 2010. This is all despite Italian President Napolitano already threatening to resign if politicians in country fail to meet responsibilities on reform measures.

Annual borrowing figures from the UK are expected to crown over the £121bn figure from last year and show that Chancellor George Osborne has failed at yet another metric of his plan to heal the UK economy. Spending cuts have been slowed to allow some room to breathe but growth has not been forthcoming. These figures won’t tell us anything new.

U.S. data this afternoon comes in the form of new home sales and Richmond manufacturing data. Yesterday’s existing homes sales numbers saw a 0.6% fall in the number of pre-built homes sold in the month of March so a 1.2% increase in new home sales could be a stretch. Richmond manufacturing is expected to contract to two from three following similar contractions in the New York and the Philadelphia measures.