Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.
Demand isn’t there at the moment in the economy. Production isn’t being utilized. Any monetary policy will only be temporarily of benefit to the market and keep them happy (as it has done for six months).
- As Goldman's money-printing tentacle Carney arrives, everyone else leaves: Tucker to Leave BOE (WSJ)
- So much for pent up demand: Refinancings Plunge as Bond Yields Rise (WSJ)
- Singapore Censures 20 Banks for Attempts to Rig Benchmark Rates (BBG)
- Behind the Big Profits: A Research Tax Break (WSJ)
- While working for spies, Snowden was secretly prolific online (Reuters)
- Turkey to Await Ruling on Park as Erdogan Meets Protesters (BBG)
- Iran votes for new president, Khamenei slams U.S. doubts (Reuters)
- NSA revelations, modified wheat cast a pall on U.S. trade talks with Europe (WaPo)
- Euro zone inflation subdued as employment keeps falling (Reuters)
A dispassionate review of a slew of Chinese economic data. Why the capital inflows are not a result of Qe as much as Chinese investors gaming their own system. Why the lower inflation is not evidence of Japan exporting deflation, as some have claimed. Why the decline in imports may be related to prices and foreign demand, more than Chinese demand itself.
The uncertainty about when the Fed will begin tapering its programme of asset purchases has increased volatility, both pushing and pulling on global financial markets. “at this juncture, the markets are more concerned about tapering than about weak [US and global] growth,” says MIG Bank’s Chief Economist, Luciano Jannelli.
Year-over-year inflation in Venezuela accelerated to 35.2% - up from 20.1% YoY in December. Goldman is concerned as the 6.1% MoM (the highest on record) in May means inflation is now endemic and the economy could easily veer from the current stagflation equilibrium into the dangerous and slippery road to hyperinflation. In a sentence that rings all to close to home, they sum up: All in all, we are increasingly concerned with the inflation and monetary dynamics in Venezuela as the classical Sargent and Wallace (1981) “unpleasant monetarist arithmetic” of severe fiscal dominance brought about by growing monetization of fiscal deficits and very weak policy credibility could easily degenerate in a recessionary hyper-inflationary spiral. That must mean it is time to buy the Caracas Stock Index (+72% YTD, +600% since Jan 2012)?
Not exactly a ringing endorsement of his hodgepodge of old ideas and new contradictions.
In almost every asset class, volatility has made a phoenix-like return in the last few days/weeks and while equity markets tumbled Friday into month-end, the bigger context is still up, up, and away (and down and down for bonds). From disinflationary signals to emerging market outflows and from fixed income market developments to margin, leverage, and valuations, here is the 'you are here' map for the month ahead.
The missing link to Japan's Abenomic recovery is and will be wage inflation: without it, soaring import costs which have more than offset any benefits from a modest rise in exports (and a still negative trade balance), will be for nothing, and if the wealth effect begins slowing or, heaven forbid, reversing, and the USDJPY slides back under 100 dragging the Nikkei down with it and all those hedge funds who scrambled into Japan with hopes of get rich quick dreams exit stage left, all bets are off. The result, ironically, would be an even worse bout of deflation than the country had in the recent past as all Abenomics will have done is pulled demand forward driven by transitory stock market gains, while far stickier import energy costs hammer the consumer's discretionary cash flow. In the meantime, corporations aren't waiting, and in a need to protect their bottom lines are doing to selling prices what they have zero intention of doing to wages and costs: hiking them. So following in the footsteps of many other luxury, and not so luxury, goods makers, Apple was the latest to announce overnight that it is hiking the prices of select iPad and iPod models by 16% and 14% respectively.
Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.
Is the coming financial collapse going to be inflationary or deflationary? Are we headed for rampant inflation or crippling deflation? This is a subject that is hotly debated by economists all over the country. Some insist that the wild money printing that the Federal Reserve is doing combined with out of control government spending will eventually result in hyperinflation. Others point to all of the deflationary factors in our economy and argue that we will experience tremendous deflation when the bubble economy that we are currently living in bursts. So what is the truth? Well, for the reasons listed below, we believe that we will see both.
The pattern is obvious. The dollar is going up. The question is why. In one word, the answer is arbitrage.
Inflation slowed in 24 (of 27) EU nations in April to leave the average EU rate at 1.4% (versus 1.9% in March). Greece entered deflation in March for the first time in 45 years and Latvia consumer prices fell 0.4% in April (versus +2.8% a year ago). This notable plunge, while 'helpful' for the average spender in the short-term, is a problem, as Bloomberg's Niraj Shah notes, sustained falling prices will increase the nation's debt burden. At the other end of the spectrum, Romania and Estonia both have inflation running above 4% and 3% respectively. Of course, none of this serial 'depression' matters, since Draghi has your back and Hollande says "the crisis is over."
With the shadow (or blue) market for Argentina Pesos already devalued by an incredible 50%, it is little surprise that the population is bidding for any store of value. Demand for luxury cars is soaring (BMW sales up 30% in the last 20 months) and Bitcoin activity is often discussed as the population transfer increasingly worthless Pesos into a fungible "currency" or domestic CPI protection; but it is USD that are the most-cherished item (despite a ban on buying USD) as hyperinflation hedges. But as Bloomberg Businessweek reports, a lot of US Dollar bills are tucked away somewhere in Argentina (in stacks of $100 bills since the number in circulation has risen from 58% of the total to 62% since 2008). One table is a 2012 Fed paper on demand abroad for US currency shows net inflows to Russia and Argentina has increased by 500% since 2006 (compared to US demand up around 10%). In fact, demand for large dollar transfers to Argentina since 2006 has outstripped demand for dollar cash overall in the world. It is safe to surmise from the data (that is relatively well guarded by the government) that over $50bn is being hoarded in Argentina (or well over one in every fifteen dollars). It is little wonder that the government is furiously digging at the country's undeclared (stashed under the mattress) wealth.