Australia

Yesterday when we discussed the surprising non-cut in the Australia cash rate, we asked "is China re-exporting the lagging US inflation it imported over 2011? " and said that "It means that Chinese inflation continues to be far higher than what is represented... and wonder: did the RBA just catch the PBOC lying about its subdued inflation?" Lastly, we concluded: "Furthermore, the PBOC did 26 billion yuan in repos, meaning it is set to conduct a net liquidity withdrawal for this week according to Credit Agricole. Withdrawing liquidity when the market expects RRR cuts?" Sure enough, as usually happens when assuming sentiment manipulation by a centrally planned powerhouse such as the US, and in far lesser degree these days, China, we were right. The news just out of China is that January inflation soared far beyond expectations, with CPI printing at 4.5% Y/Y, compared to estimates of a decline to 4% from December's 4.1%. This was the highest inflation since October. We will simply repeat our conclusion from yesterday, which while speculation then is now confirmed: "Chinese easing is a long way off... and in a market defined solely by hopes for central bank intervention this is not good." Practically, this means that the PBOC just told the world that no easing will come from China in a long time, and that the Fed and the ECB are alone in reliquifying the market. It also means that one can kiss the Chinese growth dynamo story goodbye, and once the US finally recouples with the rest of the world, the only hope will be a new announcement of QE in March so it hits its maximum efficiency in time for Obama's reelection campaign.

When all else fails, pretend it's all good. Like what Australia did, following the just released announcement by the RBA that it is keeping the cash rate unchanged at 4.25% on expectations of a 25 bps rate cut. Which begs the question: is China re-exporting the lagging US inflation it imported over 2011? So it appears to Glenn Stevens, who just said that "Commodity prices declined for some months to be noticeably off their peaks, but over the past couple of months have risen somewhat and remain at quite high levels." Or maybe they are not pretending and inflation is still alive and very much real? It also means that Chinese inflation continues to be far higher than what is represented, but we probably will just take the PBoC's word for that. Or not, and wonder: did the RBA just catch the PBOC lying about its subdued inflation? And if that is the case, does anyone really wonder why that very elusive RRR-cut is coming with the same certainty as the Greek creditor deal? Either way, the AUDJPY spikes by 80 pips on the news, however briefly, and if the traditional linkage between the AUDJPY and the market is preserved, it should have a favorable impact on risk as it means at least one hotbed of inflation remains. On the other hand, it also means that Chinese easing is a long way off... and in a market defined solely by hopes for central bank intervention this is not good. And amusingly, just as we write this, Bloomberg release a note that the PBOC is draining funds: "China’s money market rates rose after PBOC resumed fund drain via a repo operation, showing it remained cautious toward policy easing." Translation: "Hopes for a near-term RRR cut could be dashed, Credit Agricole CIB strategist Frances Cheung writes in note to clients." Oops. Furthermore, the PBOC did 26 billion yuan in repos, meaning it is set to conduct a net liquidity withdrawal for this week according to Credit Agricole. Withrawing liquidity when the market expects RRR cuts? Fughetaboutit. (and reread the Grice piece on why only idiots define inflation by the CPI or the PCE).

In contrast with better news from macro data, the negotiations about the next Greek package intensified and this will likely remain the key focus in the upcoming week. On one hand, the present value reduction in a PSI has still not been formally agreed. On the other, the Greek Government still has to commit to more reforms in order for the Troika to agree to a new program. A key deadline for this commitment is on Monday at 11am local time in Athens. Eurogroup President Juncker has talked openly about the possibility of a default on Saturday in the German weekly Der Spiegel. Beyond the ongoing focus on Greece, the week sees a relatively heavy concentration in central bank meetings, including the RBA, ECB, BOE, Poland, Indonesia and a few others. On the data side, the focus is likely on the December IP numbers due in a number of countries, including in some key Eurozone countries (Germany, Italy, France).

All you need to read.

Just a matter of when?

With harsh long-term consequences for the heavily indebted countries.

Juxtaposing Merkel's (righteous and principally correct) insistence on debt brakes and fiscal discipline with the socialist tendencies of her European (let us print) comrades is at the heart of the crisis in Europe. Nowhere is that more apparent than in these three charts, from the World Bank, which highlight just how large in absolute and relative terms Europe's social protection based government spending has become. This situation will only get more demanding as by 2060 almost a third of Europeans will be over 65 years old. While there was a belief that Europeans were willing to accept less growth for better growth (cleaner, smarter, kinder?), in order to meet the needs of an increasingly heavy 'social' burden, government debt brakes will clearly have to be unhitched further, no matter what Merkel demands (increasing tensions), or the 'new growth model' that is heralded but not yet substantive will have to be a miracle. As the World Bank notes "Europe will have to make big changes in how it organizes labor and government. The reasons are becoming ever more obvious: the labor force is shrinking, societies are aging, social security is already a large part of government spending, and fiscal deficits and public debt are often already onerous"

A brief and comprehensive summary of the main events in the past week, both good and bad.

All you need to read.

Despite German and French Manufacturing and Services PMI data outperforming expectations, European equity indices are trading down at the mid-point of the European session on extended concerns over the still-not-settled Greek PSI agreement.  Further downward pressure on German markets came from Siemens’ earnings report earlier this morning, with the company missing their revenue targets and foreseeing a difficult economic environment for them in Q2 of this year. In UK news, despite an unexpected fall in government spending, UK debt has topped the GBP 1tln mark for the first time.

Round up for ZH readers ...

All you need to read.

The market will look for any signal on the pace of discussions over the ESM pre-funding details and the fiscal compact. Flash PMIs in the Eurozone and the IFO will also be key to watch given market fears over the activity impact of tight fiscal policy linked to the Eurozone fiscal crisis. Attention will likely shift to the US this week. Q4 GDP will likely exceed 3% mostly due to one-off drivers and less so due a genuine pick-up in final demand in our view. The FOMC statement and press conference are unlikely to lead to a change in US monetary policy. However, we will be focusing on the publication of the FOMC participants’ views of appropriate policy (specifically the path for the federal funds rate and guidance for the size of the balance sheet going forward). In addition, President Obama will give his State of the Union speech Tuesday night.

In most countries, deleveraging is only in its early stages. In a report today, McKinsey notes that total debt to GDP has declined in only three countries since the 2008-09 crisis (US, South Korea, and Australia) as total debt has actually grown in the world's ten largest mature economies (due mainly to rising government debt - Keynesian style?). Greatly concerned that the UK and Spain are slow to delever, they do note that the US is more closely following the two phase deleveraging process that 1990s Finland and Sweden followed but point to the household segment as leading the way with 15% reduction in debt to disposable income (driven unsurprisingly in major part by mortgage defaults). The bottom line is US (households) are at best one-third of the way through their deleveraging and the UK (financials) and Spain (non-financials) face much more significant pressures (which will inevitably impact aggregate demand given governmental borrowing pressures) as their deleveraging has only just begun. Historically, deleveraging has begun in the private sector and government has stepped up to borrow and fill the aggregate Keynesian hole left behind. McKinsey points out deleveraging normally takes 4-6 years which we suspect will remain an anchor for demand and growth in the mean-time (perhaps as disappointing earnings revisions are already pointing to).

A triptych of greece, cement and resolutions.