US Manufacturing PMI Ought To Look Better

24 July 2012 12:30 - MoneyCorp

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Daily market brief 24/7/12

Pressure builds on Spain

- Long-term bond yields touch 7.5%

- Short-term bill auction today

The British government wants more of its citizens' money. No change there then, but its recent efforts have strayed beyond legislation into the realm of moral suasion.  All of a sudden it is immoral to minimise one's tax obligations. Bear that in mind next time you think about making a contribution to your pension, buying an ISA or paying the baby-sitter. Alternatively, go with the famous obiter dictum of Lord Clyde* and make sure you get receipts for any Spanish government bonds you buy; you will be able to claim the losses against tax.

Not that anyone this side of the Pyrenees will have been buying Spanish government bonds recently. They are very much not the flavour of the month, as shown by the high returns demanded by investors all the way along the yield curve. Ten-year-bonds yield 7.5%, five-year bonds 7.4% and two-year notes 6.5%. Worryingly, Italian yields are not a long way behind at 6.3%, 5.9% and 4.6%. Compare and contrast with Germany's borrowing costs for the same maturities; 1.2%, 0.3% and 0%.

Those German yields might go up today as a result of Moody's negative outlook for the country's AAA credit rating, but don't bet on it. Germany will still be the destination of choice for those who want to keep their cash in Euroland, even if it costs them money to do so (a zero yield minus 2.4% inflation means a real loss of around -2.4% a year). But Moody's negative outlook is a reminder that Germany is already the vicarious owner through the EU rescue funds and the European Central Bank of considerable amounts of questionable Greek and Spanish government debt. If, alright when, Spain is bailed out that number will go up dramatically. It is unlikely to happen soon though. Not only are EU leaders off to the beach this weekend, the constitutional court will not opine on the legality of Germany's participation until 12 September.

In the meantime, investors must feign interest in the economic data. Today's cover the provisional Euroland purchasing managers' index readings for the manufacturing and services sectors, as well as for the economy as a whole. The only one with any real chance of indicating growth is German services, forecast to be 50.1. The US manufacturing PMI ought to look better, maybe even 52.1. Canadian retail sales for May are expected to have reversed some of the previous month's decline. BBA mortgage approvals are the only UK figure and Australian inflation comes out tonight.

The day's wild card is Spain's auction of three- and six-month Letras (treasury bills). Last time Spain issued those maturities it had to pay rates of 2.362% and 3.237% respectively. It is a reasonably safe bet that today's rates will be higher, but investors will want to see how much higher.

* Regarding the case of Ayrshire Pullman Motor Services v Inland Revenue in 1929, Lord Clyde made the comment that has been tattooed on the forehead of every tax avoidance specialist ever since: "No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue."



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