While you were watching the "Debt Limit Channel," the world was tending other business. Not very well. Bottom line here, for the U.S.: We are not double-dipping — not yet. There is very little forward momentum, with some of the weakest numbers since 2009. But we’re still moving.
The violent movements in markets are directly traceable to Europe, not to a new U.S. recession or to debt-limit actions. We have a workable budget deal. The opposing parties are back in their dead-end corners, where for the time being neither will do any harm: the right in pursuit of a balanced-budget amendment, the left searching for its cheese.
The July Institute for Supply Management (ISM) manufacturing survey arrived at 50.9 vs. 55.3 in June and an expected 54. The "prices-paid" subcomponent collapsed from 85.5 in April to 59 in July. The ISM’s service-sector gauge slid also, to 52.7 from 53.7, but any value above 50 signifies growth.
Consumer spending in June went negative, down 0.2 percent, with income rising only 0.1 percent. The July payroll report this morning could have been a lot worse, up 117,000 jobs, but should not be confused with "good."
Correlation is not cause, but … Europe’s newest debt/currency fix was announced July 21, a Thursday. Markets traded happily that day. Before Friday was over, the modified European Financial Stability Facility was exposed as a pathetic self-deception, the weak forced to levitate themselves as Germany avoided any meaningful commitment to the others.
Beginning the following Monday, July 25, and since: The spread between German 10-year bonds and Spanish and Italian ones has opened 140 basis points (today, Germany’s 10-year Treasurys yield 2.3 percent, with Spain’s at 6.06 percent and Italy’s at 6.16 percent). French bonds have begun to open, too.
Two traditional markers of European panic: gold, up another $40 from an already wild high to $1,663 per ounce; and the Swiss franc, valued at 94 cents (in U.S. currency) one year ago, reached $1.22 on July 25 and $1.32 today.
The euro itself is holding at $1.42 (in U.S. dollars) in dynamic tension: If the zone collapses on Germany, Holland, Austria and Finland, it will rocket toward $2, a new hard-currency safe-haven — a big Switzerland.
If Germany concedes, and the European Central Bank prints cash to buy "Club Med" bonds en masse, the euro will collapse below $1.
Since July 25, the S&P 500 has departed 1,344 points, its six-month trading range near there — to 1,182 today. A straight-line 12 percent loss. The inflation yahoos have lost again, just dead wrong for five-straight years: Oil is often a panic-proxy for gold, but has dumped to $85 per barrel; natural gas from $4.50 to $4; copper from $4.40 to $4.10.
The U.S. 10-year T-note traded at 3 percent on July 25 and touched 2.41 percent yesterday, despite the utterly disgraceful efforts of the left, screeching "Default!" to protect its cheese; the brinkmanship of the right; the meddlesome incompetence of the rating agencies; and media that won’t even try to get these stories right.
Part of the drop in the 10-year T-note is temporary short-covering (see "inflation yahoos," above); mortgage refinancing locks under 4.5 percent will tend to insert a floor; and today’s levels touch strong technical resistance to further declines, set last October. The bottom is here.
Looking forward, which is what matters, European chaos makes it easy for us to sell new Treasurys, and we have lots to sell: $75 billion in new long-term ones next week alone, and about that amount every 20 days ahead for at least the next two years.
A complete euro-collapse, which seems inevitable, would greatly if temporarily slow the European economy and create new global bank losses, but contagion here is hard to identify.
S&P 500 earnings are roughly 65 percent overseas, hence the stock market’s extreme reaction since July 25. However, after a euro-collapse, you’d hear a lot less about the need to diversify away from the dollar.
Somebody here may note the failure of European political processes and leadership, and begin a discussion here. The center of European failure, of course, is self-deception: a relentless refusal to modify hypothesis in the face of contrary evidence.
Here, the failure is different: We are in a policy free-for-all and leadership vacuum. Without the prior experience of a time like this, we cannot distinguish wisdom from wise guy, fanatic from frivolous, sensible from suicidal. "Tabula rasa" in "terra incognito" — that’s Latin for "blank slate" in "unknown land."
Europe is buying time for us.
The Calculated Risk Blog’s most descriptive graph, updated today:
And this most disturbing picture shows how utterly dependent we are on federal spending support — even though we cannot afford it, we don’t know how to wean off it ("transfer payments" include Social Security, unemployment benefits, etc.):