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Economy in Brief

French and Italian IP Both Drop
by Robert Brusca  February 10, 2016

December is showing weak industrial output in the euro area. We feature Italy and France and some of their IP details in the table above. But of 10 early reporting EMU members, half of them have output falling and one has output flat (Finland has a rise of 0.1%) in December.

IP for manufacturing is falling over three months in seven of 10 early reporters. Over six months, it is falling in four countries. The 12-month gain is present in all but two countries (Germany and Italy, the first and third largest EMU economies).

All four of the largest EMU economics have output falling in December. The more recent EMU economy is the weaker one that much is clear.

Turn to our second and third largest economies, France and Italy: France shows IP losses in all categories in December while Italy's IP is lower in all sectors except consumer goods.

Output is falling progressively faster in France over shorter horizons and it is nearly the same for Italy.

In the quarter-to-date, output is barely lower in Italy and up by less than 1% in France. But the output changes overall are are small either way. Sector trends in the quarter-to-date are mixed as well.

Sequentially motor vehicle sales in Italy are still quite strong. But in France motor vehicle sequential sales are weakening.

We cannot simply look at these trends in isolation, however. The world is changing. In her early remarks culled from her testimony today, Fed Chair Janet Yellen expressed confidence that growth overseas will be put back on track. But the declines in the stock markets are an issue as they destroy wealth.

And we would be remiss to fail to consider the impact of the way markets are treating European banks especially since markets are right; the European Central Bank has not been nearly as hard on banks as have the U.S. authorities. Several banks that have passed European `stress tests' subsequently got into trouble. No U.S. bank that has passed a stress test has had any trouble at all. U.S. bank shares have seen selling pressure but only like that of other stocks. U.S. banks are not viewed as being in danger.

The implementation of NIRP (negative interest rate policy) after ZIRP (zero interest rate policy) is a stunning development in Europe and Japan. While the Federal Reserve has warned banks to be prepared to negative treasury yields, the U.S. has a huge and vibrant money market mutual fund industry that would be decimated by NIRP. In the U.S., that policy is not in the cards and it is not what the Fed is hinting at. The U.S. gets knock-on effects from overseas policies and the Fed warning about that- about transmission effects.

We can see there is evidence of creeping weakness in Europe in addition to the ongoing stock market declines. What markets need to guard against is misguided central bank policy. Negative rates are a dangerous place to go but so is a having a program of rate hikes on the table when it is no longer warranted. And the Fed still has that table set. Meanwhile, the Europeans are poisoning the food. Between them they make the world a more dangerous place. Be careful where you eat and what.

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