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Market Comment
No let-up in European debt crisis
13 June 2012
Conall Mac Coille
Spanish bond yields yesterday (June 12th) hit their highest level since the inception of the euro at 6.83%, although they fell back in late trading to close at 6.71%. Pressure on Italian funding costs drove up the ten-year bond yield to 6.17%, up 14 basis points on the day, ahead of tomorrow's auction of Italian debt. Somewhat surprisingly, pressures on Italian and Spanish bonds were accompanied by a rising ten-year German bund yield, up 12 basis points to 1.42% and rising to 1.5% in early trading this morning.
Meanwhile, industrial production data continue to highlight weakening demand in the second quarter of the year. Yesterday's data release showed that UK industrial production was flat month-on-month (mom) and declined 0.1% three month on three month. However, UK industrial production rose following a sharp rebound in the electricity and gas component, up 13.6%, in April. The volatility in electricity and gas output reflected unusually cold weather in April following a surprisingly warm March.
However, output in the broader UK manufacturing sector fell by 0.7% in April. The sharp drop in the UK manufacturing Purchasing Manager Indices (PMI) survey to 45.9 in May from 50.5 in April suggests that conditions are likely to deteriorate further. The Bank of England has calculated that the Queen's diamond jubilee celebrations will knock 0.5% off UK GDP, so the UK is almost certain to experience a third consecutive quarter of negative growth through Q2.
This morning, final eurozone industrial production data are expected to show a 1.2% mom fall in April. This follows data releases at the country level showing output falling by 2.2% in Germany and 1.9% in Italy and down 7.9% on the year in Spain. These falls in output in April are consistent with the evidence from the PMI surveys that there was a renewed deterioration in demand in Q2 as the European debt crisis hit sentiment.