Monday, October 28, 2013
It's old news by now, but today we learned that U.S. industrial production in September was stronger than expected (+0.6% vs. +0.4%), and registered a 3.2% increase year over year. That's decent, unspectacular growth which shows no sign of stagnating or declining. By now, it's very likely that the industrial side of the U.S. economy has fully recovered—after more than four years—to its pre-recession levels and is breaking new high ground. As the above chart shows, the Eurozone has fallen significantly behind the U.S., but appears to be firming of late. It's safe to say that the recent Eurozone recession is over and a modest recovery there is underway.
A comparison of U.S. to Eurozone equities show just how significant the shortfall in Eurozone industrial production has been. The PIIGS sovereign debt crisis and its attendant uncertainties put a real dent in Eurozone GDP, and that in turn resulted in a Eurozone equities underperforming their U.S. counterparts by roughly one-third.
The chart above shows CDS spreads on Spanish 5-yr sovereign debt. After peaking in 2012, spreads have plunged, reflecting a significant decline in Spain's default risk. Spreads have now returned to pre-PIIGS-crisis levels, a turnaround that is not widely appreciated. Eurozone equities bottomed around the same time that CDS spreads peaked, and have recovered significantly as spreads have dropped. This suggests that the recent rally in Eurozone equities has been driven by a substantial improvement in the fundamentals of the Eurozone economy: e.g., much less default risk, the end of the recession, and the gradual return of growth. We have yet to see whether Eurozone growth can outpace that of the U.S.
Posted by Scott Grannis at 3:37 PM