Europe Kicks Markets in the Side

09/30/2011 3:36 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Just goes to show you, no matter how many things you’re watching in this market, you can still get hit from an unexpected direction.

This morning, September 30, the two measures I urged everyone to watch yesterday—one from China and one from the United States—turned in decent if not uplifting results. Nothing to cheer about, but nothing to generate new worries (beyond the current already elevated level, that is.)

But the economic data moving the market today comes from Germany and the Eurozone, where news of the worst month-to-month retail-sales drop since May 2009 and of a jump in inflation to a 3% annual rate has sent the euro down and the US dollar up—with everything bad that implies for commodities and emerging-market stocks.

In China, the final version of the HSBC/Markit Economics manufacturing purchasing managers’ index did indeed show the sector slowing less than the preliminary survey released last week.

But even through the drop to 49.9 was less of a decline than the preliminary survey’s decline to 49.4, it still put the manufacturing sector on the wrong side of 50. (In this survey, a reading below 50 indicates that the sector is contracting)

The drop wasn’t big enough to increase fears that China is headed toward a hard landing in 2012 with growth falling below the 8.2% to 8.5% current consensus. But the numbers weren’t positive enough to reduce the recent level of worry either.

The official PMI index gets released tonight. The official version of the index gives more emphasis to China’s larger state-owned exporters than the HSBC/Markit survey does.

Economists surveyed by Bloomberg expect that the index from the National Bureau of Statistics and the China Federation of Logistics and Purchasing will climb to 51.1 from 50.9 in August. This index hasn’t been below 50 since February 2009.

In the United States, numbers released today show that personal spending grew by 0.2% in August, a big improvement from the 0.7% decline (with today’s revision) in July.

The increase came in the face of a 0.1% drop in personal incomes. Both of those numbers matched the consensus among economists according to Briefing.com.

But those of us—myself included—who thought we might get a bump up in the spending number after yesterday’s bigger-than-expected drop in new claims for unemployment…well, we didn’t get our wish.

And finally, that big jump in European inflation certainly doesn’t do anything to bolster hopes that the European Central Bank will cut interest rates when it meets on October 6. An interest-rate cut, it’s hoped, would give a boost, however small, to a sinking Eurozone growth rate.

The bad news from Europe on retail sales and inflation have led to renewed fears that slow economic growth will make the Greek debt load unsustainable and lead to a Greek default. Officials from the ECB, the IMF, and the European Union returned to Athens this morning for talks that are intended to wrap up the details in the 2012 Greek budget, so the country can receive its next $11 billion rescue payout.

But while the return of the negotiators to Athens is good news, given the background of today’s news on Eurozone growth prospects, the resumption of talks is serving mostly to remind everyone of how far Greece is from meeting its commitment to reduce its budget deficit to $24 billion from $34 billion.

Much of what the Greek government agreed to do in order to secure the cash has been pushed off into November or later. For example, a promise to cut 30,000 public-sector jobs now looks like it has been postponed until 2012.

So it’s not surprising that the euro fell back to support near $1.3433 against the US dollar. With the dollar up, European stocks are down—the German DAX Index, for example, was down 2.4%. Commodities were also in retreat, with copper down 3.6% and West Texas Intermediate crude down 3.8%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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