Market Analysis

The bond market improved last week and the momentum has continued this morning on investor fears about the Euro zone. Essentially, the concern is three-fold.

First, the concern is that the near-$1 Trillion band-aid approved by the EU to alleviate the threat of short-term default in Portugal, Ireland, Greece and Spain (known now as the “PIGS”) is not a fundamental fix to the real problem which is the current level of deficit spending in those countries.  There is a very interesting chart at http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.svg that provides a graphic representation of just how high the taxes are in France, Germany and Belgium in relation to the “PIGS”. It will be easy to see how the citizens of these high tax countries will not want to see their taxes go towards the bailout of countries whose citizens are paying significantly lower tax rates.

Second, the concern is that higher taxes and smaller government payouts that will be required by the “PIGS” will cause their economies to reverse and will cause the entire European Union to fall back into recession.

Third, the concern is that the entire European Union structure and its common currency could collapse.

To put the countries of concern and the European Union in perspective, let’s first look at the European Union. The EU’s 2008 GDP of $18.388 Trillion was 30% larger than the US’s 2008 GDP of $14.204 Trillion. If you take the first 3 “PIGS”, Portugal, Ireland and Greece, their combined GDP in 2008 was $928 Billion. That is slightly less than the combined 2008 GDP of New Jersey and Ohio, and represented only 5% of the European Union’s 2008 GDP of $18.388 Trillion. Spain is a bigger issue with 2008 GDP of $1.6 Trillion (slightly less than California’s 2008 GDP of $1.85 trillion), however, Spain’s public debt as a percentage of it’s GDP at 50% (according to the CIA’s 2009 World Fact Book) is fairly low compared to other European countries and, in fact, is lower than the US’s ratio of 52%. Italy’s ratio of Public Debt to GDP is 102, France’s is 79.7 and Germany’s is 77.2.

The above conversation is not to suggest that the debt problems in Europe are not real. However, I think most American’s would find it odd if world markets were to “flee” our currency and if there were dire projections of our breaking apart if New Jersey and Ohio or even New Jersey, Ohio and California were to have financial difficulties (and many would suggest these states do have financial difficulties).

Moving on to the economic calendar, below is a recap of the headlines for this week:

Monday, May 17, 2010

May Empire State (NY) Manufacturing Index – came in at 19.11, far below expectations for a 30.0 value.

Tuesday, May 18, 2010

April Housing Starts and Building Permits – Starts expected to increase by 30,000 to an annual rate of 656,000. Permits expected to stay flat at an annual rate of 680,000.

April Producer Price Index - expected up .1% vs up .7% in March. The Core PPI (excluding food and energy) expected to be up .1% vs up .1% in March.

Wednesday, May 19, 2010

April Consumer Price Index – expected up .1% vs up .1% in March. Core CPI expected to be unchanged compared to unchanged in March.

Thursday, May 20, 2010

Initial Jobless Claims for Week Ended 5/15/10 – expected down by 4,000.

Continuing Jobless Claims for Week Ended 5/8/10 – expected down by 27,000.

Conference Board’s April Leading Indicators – expected up .2% vs March up 1.4%.

May Philadelphia Fed Survey – expected 21.3 reading vs 20.2 reading in April