Updated Macro Observations From Strategic Alpha
Submitted by Maurice Pomery of Strategic Alpha
If Trichet is using the same signals as last time (and we have to imagine he is), then the hike is at the next meeting: Kiss goodbye to Spanish and Portuguese housing:
We simply have to assume that Trichet, who has deliberately used the exact same language or code words, is signalling a move as early as the next meeting or else why use the same phrase. He must have considered that the markets would come to such a conclusion. I am therefore suggesting that we price and expect this event to happen sooner than was expected and will assume that the markets will continue to force the divergence with US rates wider. Of course we will have to see if this move, when it comes, is a policy mistake and if so it will not have been the first in my view. The point is if he is right then is King wrong? Pressure from the financial press will certainly be evident.
This obsession with the slightest rise in inflation is not without its dangers and he sounded more like the head of the Bundesbank rather than the ECB to me but he has obviously got the support of the other members which I am a little surprised by. You can kiss goodbye to the Spanish housing market (what is left of it) as most mortgages are on floating rates and Portugal and the other peripherals will feel this deeply. A rise in April will be significant but bond markets are already pricing in more hikes and this looks like the end of this cycle, even though he downplayed this (the markets don’t believe this is a one off and inflation doesn’t work like that), so just how many hikes they price in for this year will be interesting to watch but pressure will surely be brought on the peripherals again and spreads need monitoring closely from today. If this is a one-off then it just does not make sense considering the fragility of the peripherals and so my view that this is a little panicky remains and may impact on growth. This inflation is not domestically grown and certainly not evident in many areas outside of Germany.
Central banks around the world have been or will be hiking as inflation continues (Korea next) from oil and food spikes but Trichet has moved before much of an effect has been seen in EU data. I can see why the commodity basket currencies we seeing rate hikes and the ballooning Chinese economy needed some tightening and still does but this move seems a shock still. There is no sign that Bernanke is anywhere near moving but pressure is mounting on the BoE so we have the USD as a massive vehicle for funding carry trades and this looks likely to become a stronger argument over time and the Dollar looks extremely exposed to further falls in my view. I believe we need to prepare ourselves for a steep and possibly fast move lower in the DXY!
Can this stance of Trichet’s have been cosmetic and do the risks warrant the forthcoming actions? He says it is not the start of a hiking cycle so does he feel that inflation, derived externally, will disappear with a 25bp hike? Was this a move to shift EONIA rates? What if the EUR goes to 1.50, are they happy with that as it is certainly not out of the question? What will that do to the peripherals as higher rates and a strong currency will surely spell disaster. Maybe this move is to placate and comfort the German people so that they can believe their interests at the central bank are being handled responsibly and so should vote for support of EU decisions. I hope not. They made a big mistake by hiking in 2008 on the back of an oil spike and seem likely again and the German economic machine may well get a spanner in the works as Chinese leading indicators suggest to me that the slowing is picking up pace and demand may fall off a cliff. That will leave Europe exposed again as last time. I do hope King and the MPC hold firm or we will be fighting a deep recession very soon. If Trichet is proved wrong on this again then the credibility of the ECB will surely be questioned. I think it will. Actively killing growth in this environment is tantamount to suicide.
It seems the market is preparing for a strong NFP number: That will not fix much as the Dollar is still headed lower on a macro basis:
Analysts are suggesting that today’s headline number is due for a surprise to the upside after weather affected data last month but it remains a lottery to me. Revisions and underlying rates may tell us a bit more but I have a serious hatred of US payrolls data as it is nothing short of a lie and does not reflect the actual swelling numbers of long-term unemployed. In fact I will go as far to say it is a disgrace. (Rant over). However keep an eye on the hours worked today as I feel this is one of the most important releases and a significant increase (0.4-0.5) will encourage many analysts to believe a turn has arrived.
Claims have now managed to get their average below 400k for the first time in a while and this seems to be encouraging those looking for a big number today. However in real terms it has to be suggested that even by pumping up the economy with massive stimulus, the employment rate has hardly been touched and this is one of the two mandates of the Fed. Equity markets took off after the claims data but they never go down seemingly for long these days. The BLS is a farce and to highlight this; official figures showed that unemployment fell sharply for a second straight month in January, the report from Bureau of Labor Statistics was unclear about how many jobs were actually created. One surveying method found 589,000 new jobs; another survey showed 36,000 new jobs. What? Pathetic, no wonder it is a lottery and to me the headline data has little real value. If we look at a professional surveying company then we get a very different picture! Gallup suggests that: "Unemployment, as measured without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January! We are not getting the true picture in official data. It is flawed.
In my view most of the hiring is of a part-time nature as not many businesses trust the economy and nor do I as the participation rate falls and the amount of citizens discarded onto food stamps increases. I think they key to the health of the US economy is the consumer and I place a lot of importance on their expectations and behaviour now. Unit labour costs and CPI remain very low and Bernanke will not budge for some time yet on rates even if unemployment drops slightly, as he knows it may not last if the consumer starts deleveraging as I think he might. The rising cost of food and oil could spark a demand slide and quickly see the consumer back away from spending, throwing the US back towards recession. Central bankers elsewhere are killing growth with rate rises, which in developing nations like China is fine but in the developed world, the timing could not be worse and the pain inflicted on the consumer is key in the US, EU and UK alike.
This data will not influence Bernanke as it is not about data now, it is about funding the deficit and thus more spending from Obama will need more bond purchases by Bernanke as they have to take up the slack as foreign buyers continue to diversify and few seem to see this. The Feds balance sheet is ringing alarm bells to me and M2 is exploding higher. How is it that the Fed is allowed to be the biggest holder of US debt? Who authorises this extremely dangerous situation and how does he get out of it? Printing more Dollars I guess. Good Lord the Dollar is in deep, long-term trouble in my book as history confirms that printing money ends in disaster. ALWAYS. ZIRP will continue to see money evade paper assets and look for stores of value and commodities will continue to rise until Bernanke changes his stance but I am afraid he is trapped in a “Catch 22” situation now. US real wages are falling fast and the US needs the consumer spending now to get the recovery going. That is not going to happen.
In my view the inflation impact on the EM world will come soon and the first collapse is looming large and will impact the global growth story. This is a 2011 event; no doubt. The problem is that the costs of many commodities are in USD’s. I fail to see how the Fed’s actions can stop the Dollar falling and to me it is a policy tool they are comfortable with at the Treasury and if it forces some de-pegging due to insurmountable pain or potential civil unrest in Asia or elsewhere then so be it! US monetary policy is being exported to pegged Asian economies and something will snap soon. What happens if US yields start rising again? Can Bernanke honestly stop or exit Q/E? I am not sure he can now as if he does not soak up the excess from the Treasury the US will have to restructure or default. This is now not about data but funding and investors need to realise the difference, especially on days like today as they will throw up opportunity. Just when and how can the US cut their deficit? Never in its current form!
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