Marc To Market's blog

Labor disputes at ports on both US coasts could disrupt trade in the new year and skew high frequency employment data.  In could produce shortages of some consumer goods.  The resulting higher prices could filter through into measured inflation.  

The proximate cause of the disputes differ, but at its heart is a push by the employers to boost competitiveness through forcing changes in labor practices.

In 15 ports from Massachusetts to Texas, including the New York and New Jersey, the employers' union association, the U.S. Marine Alliance, seeks to cap the "container royalty", which are payments made to workers based on the weight of container cargo.  The dock workers, represented by the International Longshoreman Association, are resisting.  The workers also insist on maintaining the eight-hour a day (of pay guarantee).  

The political dysfunction of the world's largest economy is epic.  Even though Mr. Market is not forcing the US hand, the political class is intent on shooting itself in the foot.  Yet the uncertainty over next year's marginal tax rates has not impacted the hiring process as the average monthly non-farm payroll growth has not diminished.  Nor have investment plans been adversely impacted.  Non-defense durable goods orders, excluding aircraft, a useful proxy for capital investment, rose 2.7% in November after posting a 3.2% increase in October.   

Italy is not as fortunate.  Its economy is contracting.  Mr Market is likely to be less patient.  Although Italy's net debt issuance in 2013 appears less than in 2012, there is little room for error.  

Monti was looked upon as the savior of Italy after Berlusconi had undermined its gravitas on the world stage with his antics that are unbecoming of a man of his stature.   Yet Monti took his role too seriously and not seriously enough.  

Yes, it is the holiday season.  Yes, you are unlikely to be taking action with your investments.  Yes, the morphing of what is into what will be continues uninterrupted.  

There were several developments over the weekend that will influence the direction of the the markets in the days ahead, with the usual caution about the impact of the thinness of conditions.  

First, the major focus remains the US fiscal cliff.  One of the most important ways in which the US fiscal crisis differs from those seen in Iceland, Greece, Portugal, Ireland is that it has not been triggered by a capital strike. Investors have not fled the US.  Interest rates have not trended higher.   It is not a fiscal crisis.  It is a political crisis

The US dollar rebounded smartly at the end of last week as the realization that it was increasingly likely the US would go over the fiscal cliff.  This has been our base case, but many seemed to expect it to be averted and were looking past it.   

It had seemed that many participants were looking past the US fiscal cliff and were to be content taking on more risk.  However, yesterday's late developments have provided a cold slap of reality.  Our base scenario, under which the US does in fact go over the cliff appears more likely now that Speak Boehner's "Plan B" failed to draw sufficient Republican support to allow a vote.   Indeed, there is some speculation that the failure of Boehner's gambit may see a leadership challenge right after the New Year.  

The lack of a coherent Republican strategy has prompted a large unwind of risk-on and thin holiday market conditions may be exacerbating the price action.  In the risk-off mode, the US dollar and yen have performed best.  The dollar-bloc, which has generally lagged in recent days, remains under pressure.

Last week Eurogroup head Juncker warned that the situation tiny Cyprus was more worrisome than Greece.  While this seemed to be an exercise in hyperbole, sure enough Monday, a Cyprus official was quoted on the news wires warning of an imminent default.  

Hang on.  Didn't Cyprus reach a memorandum of understanding with the Troika ?  Indeed, it did. However, it will take some time to deliver the funds.  

There was a lively start to trading as the yen gapped lower in immediate response to new of the LDP's  victory in the weekend elections in Japan.  The greenback traded around JPY84.55, the highest level since April 2011.  The euro traded to about JPY111.30, just below the year's high set in March near JPY111.45.  The Nikkei gapped higher.  

However, as the results were largely as expected.  The LDP and its traditional ally, the New Komeito secured a 2/3 majority, which will prevent the upper house, in which the DPJ has a majority, from blocking the new government. 

In addition, there is some speculation that the BOJ may stand pat at this week's meeting to enhance its negotiating position with LDP-led government.  Before the weekend, the consensus was for the BOJ to expand its asset purchases plan by JPY5-10 trillion in the face of data pointing to the second consecutive quarterly economic contraction.

The outcome of Japan's elections seems to be largely in line with market expectations.  The Liberal Democrat Party won handily.  It appears to have secured a majority of lower chamber of the Diet.  

There had been some reports suggesting that it might be able to achieve a super-majority of 2/3, but this does not look to materialized.  However, with its traditional party, the Komeito, together it may. 

In any event, this is a strong mandate for the LDP's agenda.  It is a combination of nationalism and what passes for socialism in the neo-liberal age, namely increased government support for the economy via a) massive public spending and 2) unlimited monetary easing.

The euro has been the strongest currency this week.  At pixel time it is up about 1.2%.  The Dow Jones Stoxx 600 made new 18-month highs earlier in the week before consolidating in the second half of the week.  Bond markets were mostly lower, though Greece, for obvious reasons, Spain and Portugal were exceptions to the generalization.   

With few exceptions, the global capital markets which began the week with a bang, are finishing with a whimper.  The US dollar is little changed against the major and emerging market currencies.   Asia stocks were by and large flat, with the notable exception of Chinese stocks, where the major indices jumped a  little more than 4%. 

European bourses are mixed, with gains and losses mostly less than 0.25% near midday in London.  Spanish and Italian bond yields are slightly lower, but activity is quiet.   

Despite the subdued tone there are four developments to note