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"Risk Off!" After a jam packed week of economic data, things slow down domestically, so once again all eyes back to Europe. The 'bazooka' announced a week ago Thursday has seemingly not stopped the crisis - all it did was give world market's a 10-20% boost.... before last week of course. So we're back to watching hectic intraday and pre/post day moves, due to headlines out of random officials and/or newspapers and/or financial infotaintment TV.

Even as the Greek political drama still plays out, the markets have already moved onto Italy. It truly is amazing to see the situation play out, country after country, as they are restricted from following U.S./Japanese/U.K. policy of printing more currency to 'solve all problems'. I keep repeating if these countries were not bound in the E.U. all the world would be facing is a bad inflation issue as almost all these countries would be following the U.S. playbook of helicopter drops.... gold would probably be significantly higher however.

Ten year yields in Italian debt were jumping last week, DESPITE the ECB buying, which is quite amazing actually. They continue to surge. But keep in mind, unlike the Federal Reserve which can buy (print) in unlimited quantities, the ECB has a limited capital base. I've been saying for about 2 years the end game here is the ECB charter has to change (despite German objections) and in the end the ECB will pull a Bernanke. That's the only way to contain Spain, Italy, and France. Yes France, which seems to be getting a free pass despite some ugly fiscal figures! But that's a crisis for another day, as bond vigilantes go country by country....

  • Italian benchmark yields climbed to a euro-era record amid concern the region’s third-largest economy is struggling to manage its debt loads, while growth in the region is faltering.
  • German two-year note yields were within six basis points of an all-time low before European finance chiefs meet to discuss the region’s bailout fund. The extra yield investors receive for holding 10-year Italian debt over similar-maturity bunds fell from a euro-era record after Il Foglio said Prime Minister Silvio Berlusconi may step down within “hours.”
  • Italy’s 10-year bond yield climbed 19 basis points, or 0.19 percentage point, to 6.56 percent at 11:10 a.m. London time, after rising to a record 6.68 percent. That pushed the difference in yield, or spread, over German securities to as wide as 491 basis points.
  • The Italian two-year note yield surged 54 basis points to 6.0 percent, narrowing the spread over 10-year yields to 80 basis points, the least since September 2008.
  • Berlusconi’s majority is unraveling before a key parliamentary vote tomorrow, with allies pressuring him to step aside. Two defected to the opposition last week, and a third quit late yesterday, while six others called for Berlusconi to resign and seek a broader coalition in a letter to newspaper Corriere della Sera. More than a dozen more are ready to ditch the premier’s coalition, Repubblica daily reported yesterday, without citing anyone.

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Meanwhile, back in the real economy, Germany - the driving force in Europe - continues to post dramatically slower economic data. It is quite clear now with the data we've seen the past 2-3 months, that Europe is in recession.

  • German industrial production down -2.7% m/m in Sep. This compares to -1.0% in Aug and a consensus of -0.5%. German manufacturing production down -3.0%, construction -0.8% and energy -0.7% m/m.

European retail sales were also punk:

  • European retail sales declined more than economists forecast (-0.1%) in September, dropping 0.7% from August, the biggest fall since May. Sales of food, drinks and tobacco in the euro area in September were flat. Sales of goods other than fuel fell 0.8%.
  • Germany saw a 0.4% increase in retail sales in Germany in September, compared to August, but there was a decline in France, where sales fell 0.6%. In Spain, the single currency's fourth-largest economy, sales fell 1.7% as the country struggles with the highest jobless rate in the euro zone that is crimping consumer spending.

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Speaking of rumors - in the time it took me to write this, rumors are surfacing that Berlusconi will resign and the Italian market just went from -2% (after being down 3% earlier) to +2%. Uh, in about 10 minutes.

This is no one's idea of fun other than headline grabbing computers ...

Source: Greece Is So Last Week, Now We Worry About Italian Bond Yields