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Macro View: Europe's Glacial Move To Federalization

October 19, 2012

Finally, there are now open discussions and a broader consensus about the need for federalization in Europe. I see all of these developments as straws in the wind that tell us this is a buying opportunity for relatively depressed European equities.
-Scott Minerd, CIO, Guggenheim Partners

Uncertainty continues to weigh on European markets but the continent is still drifting toward federalization. Recent trends and political developments are constructive for an eventual return to growth for the region.


“After visiting Europe last week I remain fairly sanguine about the situation there, especially given policymakers’ apparent commitment to continuing to tackle the issues that confront the Eurozone. While we will inevitably go through fits and starts, the bottom line is that Dr. Draghi’s resolve to keep the euro intact is supporting confidence in the region.

Wages in Greece and Spain have come down meaningfully over the past year and we are also seeing increased inflation in Germany. As these trends continue, the periphery will become more competitive relative to the core, which should ultimately increase demand for employment in the nations which are worst affected by the crisis.

Over the weekend, Germany’s finance minister Wolfgang Schäuble said that a Greek exit from the Eurozone is not an option, and there is now talk about relieving some of the austerity pressures on the periphery. This would give Greece more time to meet its targets and lessen the expected budget constraints facing Spain and Italy. Although it appears the establishment of a banking union may be delayed by another year, its occurrence is almost inevitable at this point. A banking union is key because it would be difficult for Europe’s problems to unravel further under a common regulator.

Finally, there are now open discussions and a broader consensus about the need for federalization in Europe. I see all of these developments as straws in the wind that tell us this is a buying opportunity for relatively depressed European equities.”

Economic Data Releases 

Robust Retail Sales Should Bode Well for 3Q GDP


U.S. retail sales rose 1.1% MoM in September, with upward revisions to both the August and July data. With all three months in the third quarter now having reported, the average quarterly change was 1.4% from the previous period. The strong growth in retail sales should bode well for personal consumption and will lift GDP growth for the quarter. Meanwhile, industrial production rose 0.4% in September, and the capacity utilization rate increased modestly to 78.3%, up 0.3% from the previous month but still well below historical norms. Both the consumer price index and the producer price index reported higher-than-expected monthly increases in September, led by increases in food and energy prices. In October, the regional manufacturing index for New York rebounded to a three-month high, and the University of Michigan consumer confidence continued to advance to a five-year high. Jobless claims fell substantially to 339,000 last week, the lowest level since 2008.


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