Europe Could Return to the Headlines Soon

With the exception of the Brexit vote, investors haven’t worried much about Europe for a couple of years. After the European financial crisis didn’t bring the world economy to its knees, Europe stabilized and then improved a bit. Quantitative easing from the European Central Bank (ECB) provided most of the support. Other policymakers were able to reach compromises that prevented defaults by Greece and a few other countries that were on the edge. European banks improved their balance sheets.

Europe might stay on the path of slow, steady improvement, but several events on the calendar might derail recent trends.

One of the two major events is Britain’s plan to formally submit in March 2017 its intention to leave the European Union. That will be followed in May by state elections in Germany. Some analysts think Theresa May of the United Kingdom deliberately selected the March date to start the Brexit process because it would put a lot of pressure on Germany’s Angela Merkel to reach a deal that doesn’t roil the economy and markets before Germany’s elections. The federal election that will determine Merkel’s re-election bid will be held in September.

But there are other key events. This month, European Union countries must submit their budgets to the European Union for review; Portugal’s credit rating is up for review; and the Greek bailout program has its next review.

Before the end of this year, there’s a key referendum in Italy, and Spain might have an election. Also, the economic sanctions on Russia will expire, so there will be a debate on renewing them. A decision on continued debt relief to Greece also must be made by Dec. 31.

Early next year, there will be key elections in the Netherlands and France, in addition to the German elections.

Added to this mix are the continuing troubles of Deutsche Bank. You’ve probably seen stories on the recent developments. If not, read this good summary. There’s also the continuing refugee crisis, which could make the coming elections interesting.

The probability is the current trends will continue. The European economy will continue its gradual improvement with the help of the ECB. But that’s not a sure thing. Even if things eventually turn out well, there could be a lot of ups and downs. The risks appear to be reflected in European stock prices, but not in bonds and the euro.

The Data

Last week’s Employment Situation reports disappointed some, but overall they were positive. Job increases, though at the low end of expectations, still showed a solid gain of over 150,000 jobs. This indicates that despite all the worries from many analysts, the economy continues its steady growth. The labor market is near the point when employers will have to increase wages to keep and retain good employees. Wage increases have been higher in recent months than earlier in the recovery, but are still below long-term averages. The same is true for hours worked.

The JOLTS (Job Openings and Labor Turnover Survey) report for August was a negative surprise. The JOLTS report is more detailed than the Employment Situation reports, and so JOLTS is a month behind. The August report found job openings declined 7.3% and that hiring also declined. All numbers still are at healthy levels, but indicate slower growth in August than a few months earlier.

New unemployment claims were unchanged, though last week’s number was revised from a decline of 5,000 claims to a decline of 8,000. That keeps the number near historic lows.

The NFIB Small Business Optimism Index still is above the two-year low it sank to in March, but it now has declined for two consecutive months. There are positive elements in the survey. More businesses are optimistic about the next six months. Also, there are solid plans to hire more workers and increase capital investment.

Consumer credit delivered a positive surprise last week. The overall amount of outstanding non-mortgage credit rose sharply, for the highest gain since last September. Auto loans and student loans were strong, of course. There’s nothing new there. But credit card debt outstanding had a strong increase, the third highest of 2016. This likely indicates both consumer confidence in household finances and higher retail sales to come.

The Markets

It was a negative week for most stock indexes. The S&P 500 was down 0.89% as of Wednesday’s close. The Dow Jones Industrial Average lost 0.71%. The Russell 2000 declined 1.63%. The All-Country World Index lost 1.47%. Emerging market equities declined 1.80%.

Long-term treasuries lost 1.20%. Investment-grade bonds returned 0.07%. Treasury Inflation-Protected Securities (TIPS) dropped 0.22%. High-yield bonds were the best of stocks and bonds, losing only 0.02%.

The dollar surged 1.81%.

Energy-based commodities lost 0.26%, though they had a strong week before Wednesday. Broad-based commodities gained 0.08%. Gold declined 0.98%.

Bob’s News & Updates

I’ll be at the MoneyShow Dallas next week but will try to send a brief email between all the convention activities.

In the meantime, add to the positive reviews of the second edition of my book, “The New Rules of Retirement.” If you haven’t already, order your copy today.

Some Reading for You

Here’s a good summary of the problems Deutsche Bank is having and what they might mean for the global economy.

Byron Wein of Blackstone wrote about what he learned on a recent trip visiting investors in the Middle East.

An official of the International Monetary Fund said China needs to do something about its “debt addiction.”

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.