European Car Sales Hit 20-Year Low; Don't Worry, Things Have Stabilized

NPR reports European Car Sales Hit 20-Year Low For May.

Country by Country Details

• Passenger car sales dropped by 5.9% from May 2012 in the 27-country European Union to 1.042 million units, the lowest level since May 1993
• German car sales dropped 9.9% in May, Italy was down 8%, France down 10.4%, Spain down 2.6%
• PSA Peugeot-Citroen, Renault, Ford, General Motors and Fiat all suffered double-digit declines in May
• Volkswagen had a 2.8% drop in brand sales and 5.9 percent decline for the group. Sales of Mercedes brand were up 2.8% percent and BMW brand sales declined 8.1%.
• Jaguar/Land Rover and Japan's Mazda resisted the crisis with a 9.8 percent and 30 percent increase in sales, respectively, but on much smaller volumes and a market share of just 1 percent. Korean automaker Hyundai saw sales rise 1.9 percent.

First Quarter GDP

• GDP in the 17 country eurozone shrank by 0.2 percent in the first quarter of this year, the sixth such decline in a row
• The wider 27-country EU has also seen its economy slide into recession, shrinking 0.1 percent in the first three months of 2013

Italy VAT Hike

"The head of Italy's association of foreign carmakers, Romano Valente, urged the government to resist raising the value-added tax on car sales. The tax is scheduled to increase to 22 percent from 21 percent in July. Officials have said it will raise 4 billion euros ($5.33 billion), but conservative lawmakers in the cross-party coalition are opposed, claiming it will hit sales of big-ticket items harder."

For Italy economic comments, please see Dumb and Dumber Tax Hikes in Italy; Grand Coalition Splintering; Another Italy Convulsion Coming Up

Signs of Stabilization?

My favorite comment comes from IHS Automotive analyst Carlos da Silva who sees the situation in Europe as stabilizing: "The situation remains tense. Yet, for the second month in a row the rate of decline is slowing down. This means that sales are stabilizing trend-wise."

Stabilizing? Really? With German sales plunging? And a VAT hike in Italy? With Spain in a Depression? With France imploding under Hollande?

I suggest the slide in Germany and France is going to catch nearly every economist off guard with its intensity. A VAT hike in Italy will be icing on the depression cake.

At least one can make a claim about pent-up demand in Europe. One cannot say the same thing in the US.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Cash Squeeze in China, Interest Rate Swaps Rise Most in 22 Months; China's Credit Bubble About to Pop; Shadow Banking Crackdown

Bloomberg reports China Swaps Surge as Cash Squeeze Sees Demand Wane at Debt Sale.

China’s one-year interest-rate swap rose by the most in 22 months as the central bank refrained from adding funds to the financial system to ease a cash squeeze, causing demand to fall at a government debt auction.

“The cash shortage may get even worse before the quarter-end because banks will have to hoard cash to meet loan-to-deposit ratio requirements,” said Chen Qi, a strategist at UBS Securities Co. in Shanghai. “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows.”

“The market is disappointed by the lack of reverse repos from the PBOC,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “The liquidity squeeze stems from less inflows and policy makers’ own policy to crack down on shadow banking, so the PBOC may be reluctant to use short-term tools to help.”

Fitch Ratings said in a statement yesterday that the cash shortage reflects the move to reduce shadow banking, a measure that will ultimately slow economic growth.

Capital Flight

The statement by Chen Qi “The central bank probably won’t come out to intervene unless there is a sharp decline in economic growth and large capital outflows” is interesting.

Qi's statement comes fresh on the heels of an article by Ambrose Evans-Pritchard a few days ago entitled China braces for capital flight and debt stress as Fed tightens.

A front-page editorial on Friday in China Securities Journal - an arm of the regulatory authorities - warned that capital inflows have slowed sharply and may have begun to reverse as investors grow wary of emerging markets. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens.” it wrote.

The journal said foreign exodus from Chinese equity funds were the highest since early 2008 in the week up to June 5, and the withdrawal Hong Kong funds were the most in a decade.

It also warned that total credit in Chinese financial system may have reached 221pc of GDP, jumping almost eightfold over the last decade. Companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies and much of the liquidity is being used to repay debt and not to finance output,” it said.

There have been signs of serious stress in China’s interbank lending markets, with short-term SHIBOR rates spiking violently. Bank Everbright missed an interbank payment last week in a technical default.

“Liquidity conditions have tightened severely due to the crackdown on shadow banking activities,” said Zhiwei Zhang from Nomura.

China's Credit Bubble About to Pop

In a followup post, Ambrose Evans-Pritchard writes Fitch says China credit bubble unprecedented in modern world history

China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. 

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.

"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up. "Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire US commercial banking system in five years," she said.

The China Securities Journal said total credit in China's financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. "Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output," it said.

Shadow Banking Crackdown

This shadow banking crackdown is a good thing. The longer it is put off the more violent the reaction when it does happen.

Yet, the crackdown was put off so long already, severe ramifications on growth are already baked in the cake.

In turn, the slowdown in China will hit the commodity exporting countries (Australia, Brazil, Canada) quite hard.

For my recent take on Brazil, please see Brazilian Currency Touches Four-Year Low Prompting Intervention; Currency Intervention Madness Displayed in Chart Form

For more on the huge impending slowdown in China please see

• Pettis on China, Europe, Japan: Bad News for Those Looking for Growth
• Epic Glut of Graduates Depresses Wages; Fake Job Offers Taint Hiring Statistics

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Brazilian Currency Touches Four-Year Low Prompting Intervention; Currency Intervention Madness Displayed in Chart Form

Bloomberg reports Brazilian Currency Touches Four-Year Low, Prompting Intervention

Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day as a report showed higher-than-forecast inflation.

“If there’s more currency devaluation, there will be more inflation,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “On top of that, the IGP-M shows that wholesale prices are under pressure again.”

Brazil may use all available instruments to contain the real’s volatility including selling dollars in the spot market, central bank president Alexandre Tombini said in an interview with Valor Economico published yesterday.
The currency has fallen more than 5 percent since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may taper its stimulus program if the outlook for employment shows “sustainable improvement.”

Real Monthly Chart Shows Intervention Madness



click on chart for sharper image

Flashback March 3, 2012: Brazil Declares New Currency War on US and Europe.

The Financial Times reports Brazil declares new ‘currency war’

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

Check out all these recent reports of Brazilian Real Intervention.

Is this madness or what?

By the way, with the huge slowdown in China (and Chinese demand for commodities plunging), Brazil is going to have a damn tough time stopping the slide in the Real and an equally hard time controlling inflation.

What happened to the alleged nirvana "When the real appreciates, it reduces our competitiveness"?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com