Spanish Bond Auction Finds Solid Demand
Yields fell and demand was robust at Spain’s short-term debt auction Tuesday. Spain’s Treasury sold €2.6 billion in 12-month bills at 3.918% (down from 5.074% in June) and €961 million in 18-month bills at 4.242% (from June’s 5.107%). Demand was more than two and four times coverage, respectively.
Many observers pegged last week’s austerity package as falling yields’ catalyst, and perhaps the €65 billion in spending cuts and tax increases did help investors see Spanish debt as a bit less risky. Then again, Spain’s primary concern isn’t unmanageable public debt (though, certainly, there’s ample room to trim the public sector), but troubled banks. And over the past week, key elements of Spain’s bank bailout package have slid into place, perhaps easing some market jitters. Eurozone finance ministers agreed to provide the funds via 15-year loans at sub-3%. Even if the loans remain on Spain’s bank balance sheet, below-market rates should help keep debt-service costs manageable. Spain and Finland have agreed on collateral for Finland’s share of the aid. And Germany’s Parliament seems set to approve on the package on Thursday.
Additionally, the ECB has dropped its insistence Spain compensate senior bondholders in Spanish banks if the banks fail or are restructured. This is the opposite of what they mandated in Ireland, which added roughly €30 billion in high-interest debt to Ireland’s balance sheet, making Ireland more dependent on external aid than it otherwise could have been. If the European Commission and finance ministers agree with the ECB’s new stance, it could further increase investors’ confidence Spain—and the eurozone—isn’t falling apart.
US Industrial Production Reaccelerates and Expands
Following a -0.2% dip in May (+4.4% y/y), US industrial production (IP) rebounded nicely in June (+0.4%)—solidly besting expectations. Diving deeper into the data, manufacturing and mining production rebounded solidly, but declining utility production detracted. Automotive production recovered from a relatively steep decline in May, and business equipment production (+1.6% m/m) reaccelerated.
To be sure, month-to-month headline IP figures can be volatile and subject to revisions down the road. However, contrary to headline proclamations June’s result marks a resumption of the expansion, the trend—strong growth—hasn’t changed much since the recovery began. Far smoother year-over-year figures continue to be nicely positive—June’s print was up 4.7% from a year ago and marks the 10th consecutive quarter of year-over-year growth. (See Exhibit 1.) To put that in perspective, the 4.7% y/y rate is faster than any seen during the entire 2001-20007 expansion.
Exhibit 1: US Industrial Production (Year-over-Year Percent Growth)
Source: Federal Reserve, Thomson Reuters.
An Inflated Focus on Demand?
In what’s generally perceived as a too-slow growth environment, one would probably think overall slower inflation a mostly good thing, right? Allowing businesses and consumers alike to avoid sharply increased prices for inputs and finished goods, respectively. Not to mention creating an environment in which central banks can take action (if necessary) without worrying about imminent inflationary pressures.
Not so, according to one take on the news the US inflation rate was flat in June. It seems too-low inflation (note: not deflation) is now worrisome, too, because it prevents businesses from raising their prices, further hampering their ability to grow. A slightly odd take, in our view, given not long ago, many in the media were concerned continued accommodative Fed policies would spur inflation, necessitating monetary tightening and slowing the economy overall.
But we’d suggest, instead of looking at prices only from a consumption and demand perspective, thinking of what still-tame prices mean for American businesses. Seen through that lens, that prices remain relatively contained is probably a good thing, even if it means final sales prices also remain low. Relatively cheap inputs support businesses’ abilities to continue producing, developing efficiencies and innovating, hiring, etc.
Though the media often forgets, it’s important to look at economic news from both sides: demand and supply. The latter is just as crucial (if not more so, in our view).