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Muted Turnaround Tuesday
The stage for Turnaround Tuesday was set yesterday when the euro and sterling held the pre-weekend lows and the Dollar-Index did not extend last week's gains. The US-German 2-year spread, which continues to do a good job tracking the euro, also helped below last week's high and now is trading at its lowest level (smallest US premium since the middle of last week). Yet given the news stream and market positioning, the turnaround appear to lack conviction. The euro ran into offers near $1.3080 and sterling bears took a stand near $1.5200.
A stronger turnaround than the dollar can be found in China and Italy. China's stock market was hit hard yesterday after the weekend measures to slow the housing market Led by the financials, the Shanghai Composite recoup nearly half of yesterday's losses. The National People's Congress began earlier today and the government announced a GDP target of 7.5%, unchanged from last year, and boost a 10% increase in spending that would be focused on health care, education and agriculture, according to reports.
Italian bonds and stocks which fell yesterday are recovering today. The impetus is two-fold. On one hand, following the yesterday's EU meetings, the Economic and Monetary Commissioner Rehn reaffirmed a more lax stance, indicating that the protracted downturns could justify reviewing deficit targets for a "certain number" of countries. This leads to the second spur of today's correction. While this was clearly the direction of movement before the Italian election, it creates space for a possible political compromise in Italy to allow some weakening of Monti-induced austerity without triggering a backlash. As messy as it may appear, the Italian political forces do appear to be moving toward some kind of solution to the hung parliament. Remember even under the best of circumstances, when the center-right won with a landslide, it took four weeks to put together a government.
The euro area service PMI showed a bit of improvement from the 47.3 flash reading, rising to 47.9. However, the real take away, and one not lost on the foreign exchange market which sold into the euro's bounce, was that the February reading was weaker than the 48.6 seen in January. The Markit group that compiles the data says it is consistent with 0.2% contraction in Q1 GDP. Of note, the recovery in Germany seems more solid, though there is some anxiety ahead of the industrial orders and production reports later this week. France also showed improvement over the flash (43.7 vs 43.6), but is so far below 50 to make it irrelevant. Italy's and Spain's reading were horrible at 43.6 and 44.7 respectively falling from 43.9 and 47.0.
Separately the euro area reported a stronger than expected 1.2% rise in January retail sales, slowing the year-over-year decline to -1.3% from 2.9% at the end of last year. On its face, this does not seem sustainable and the real signal from the euro area is one of weakness in aggregate demand and high levels of unemployment.
After reporting weak manufacturing and construction PMIS, the UK reported a better than expected CIPS service PMI. It rose to 51.8 in February from 51.5 in January. The consensus had expected a decline to 51.0. It is the highest reading since last September. Sterling reacted positively and although it does support economic forecasts calling for a small expansion in Q1, there was warning embedded in the day. Input costs rose to a 14-month high and this warns of a potential squeeze on margins. This may help explain why the gilts are the worst performing core bonds market today and why the FTSE is lagging behind the major European bourses.
The Reserve Bank of Australia was first of the major central banks to meet this week. It stood pat and issued a statement that was quite similar to the previous one. The economic data reported before the meeting supported the decision. January retail sales rose 0.9%, which was twice the gain the market expected and the first increase in four months. Separately, the current account deficit unexpectedly narrowed in Q4 12 as the narrowing of the income deficit offset the deterioration of the trade balance.
There are three developments in Japan to note. First, one of the less appreciated aspects of Abenomics is to boost labor income. The government must be pleased then with the news earlier today that labor cash earnings rose 0.7% year-over-year in January. The consensus had anticipated a 0.3% decline. It remained a better than expected report even though the December data was revised to show a 1.7% decline rather than 1.4%. It was the first positive figure since last April. Second, in testimony BOJ-deputy nominee Iwata who previously seemed to advocate foreign bond buying seemed to pullback, suggesting that other measures needed to be tried first. Third, the DPJ, which has a majority in the upper house is threatening to block the same Iwata's nomination on grounds that he supports a change in the BOJ's charter (erosion of its nominal independence).
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That income rise in Japan is for salaried, full-time workers. It should be noted that nearly 50% of the Japanese workforce is part-time or some form of unsalaried worker. Still, the 0.7% YoY increase does not keep up with the effects of the weakening of the Yen over the past few months.
Meanwhile the government is posting data that says consumer prices fell 0.2% in January based primarily on the prices of durable goods, like air conditioners - which dropped 30% (and which supports Abe's continuing efforts to weaken the Yen - not surprisingly). The price of energy (not included in the CPI) rose 4% from the previous year and gas rose 4.6% in January.
So, pick your data points carefully.
Well, it was a key point in a speech given last month by BoJ member Takehiro Sato. In it, he stressed one of PM Abe's main points about domestic consumption when he urged that companies (who can, he said...) raise the wages and pay scales for their workers.
He went on to lament that if giant corporations hadn't been hoarding money all along or trying to improve their balance sheets for the execs, then the Japanese economy wouldn't be in such bad shape now.
http://www.boj.or.jp/en/announcements/press/koen_2013/data/ko130206a1.pdf
:D
One other note about those giant corporations who have been hoarding cash. While everyone talks about reforming the pension/SS system in order to fiscal order, there is never any mention of reforming the massive corporate welfare system which continues to flood those same corporations with public funds, including - believe it or not - paying corporations to retain workers (effectively paying the salary of those employees). How long do you think that policy will be effective?
Your points actually fit in well with my ideas of taking a longer-term view. It is the same in Japan as it is in America.
The corporation has something in mind that will bring them profit down the road, so they go to the Congress, wine and dine a few Senators and get their bill passed. Now that company is out making money at the exclusion of everyone else.
The Congressperson is only thinking about the two years until the next election and has the singular concern of what "pork" they brought back to their district, thus, in essence, buying votes.
The Senator does not get re-elected but the company that bought and paid for the special rights law is still operating at the expense of everyone else.
There can be no doubt that the entire system should be over-hauled and updated for the twenty-first century. Bruce Krasting pointed out the other day that Social Security was created in 1937 or something like that and hasn't changed in its structure since that time. He showed a picture of a gutted and rusted-out 1937 Plymouth for a visual effect and that has stuck in my mind.
We cannot continue doing business as usual because those paradigms were developed when there was no instant communication via the Internet and before there were demographic problems in the people native to a country.
It is ironic that the most short-term view is to simply do nothing to fix anything because the problems are so ingrained in the structure that it would take years to tackle a single issue...and by that time, you'll be out of office, collecting a fat pension and working as a lobbyist trying to get more laws passed to help your stock price.
It's time for a do-over; this time with a structure that rewards long-term thinking and nixes short-term, exclusionary benefits. It's time we start thinking of society as a whole- and here I mean the entire planet- by trying to make government better for everyone.
:/
I am not naive and you may say I'm a dreamer. But I'm not the only one.
:D
Indeed. Separating the government from the economy should be the first step. There is simply too much incentive for corruption and too many willing participants in the public and private sector. A wall between the two would change everything, though it is doubtful that anyone could - or would - build it.
Japan's workforce is totally screwed mostly because of the labor laws promoted by those same corporations. Japan is already at a disadvantage with the rest of Asia because of their high wages which has led to massive off-shoring and the practice of dropping former full-time employees into part-time, no benefit workers.
Unless the labor laws are reformed to allow for more mobility and greater competition, the true value of labor in Japan will never be realized and politicians and connected corporations will continue to manipulate the workforce for their advantage. Asking companies to increase the wages is a political move and will do nothing to benefit the economy in the long term.
Sato was merely carrying the political ball for Abe, not challenging the frat boys from Todai.
Yeah but the whole scenario sounds very familiar.
I suppose it is Pollyannish but I do wish that greed wasn't such a dominating factor in business decisions. Rather, substitute some of the greed idea for a more long-range view.
Unfortunately, in the States and Japan and I imagine everywhere else in the world, the viewing range is getting shorter and shorter and gratification must become more immediate all the time.
Building a company- or a country- for the long-haul has been disrupted by the "necessity" for short-term thinking and instant rewards. It is the bane of humanity, I am afraid.
:/
I disagree to this extent. Without the corporate-government monolith running the show for their own advantage, humanity would proceed in a much more equitable manner. In Japan, the education system, the labor market, and, to a large extent, the society have all been manipulated and controlled by Japan, Inc (which includes the government). Sadly, there are no policy measures that can fix that system as long as reform is left to the same people that built the system.
This column is a masterpiece of Nothingspeak.
Trade much?
EUR/USD remains comfortably within it's forty-five degree downsloping channel. There's really nothing to talk about. When the EUR takes out 130.50 and maintains it; and then busts down below 1.30 on three consequitive days close basis; then there'll be something to talk about. Short from 1.3164 basis June and in profit.
DXY daily chart retracement & DOW daily megaphone wedge confirmed thus more equity upside while DXY retraces from current overextended level.
Bullish warning for DXY monthly long term chart continues and this will not change.
trader618