China's New Government; Europe's New Official Stagflationary Recession

Tyler Durden's picture

The main overnight event, if not very surprising, was the formal announcement of the power moves at the top of China from the now concluding 18th Communist Party Congress, which occured largely as expected. To summarize: "Xi Jinping took the helm Thursday of a new, trimmed down Communist Party leadership that insiders said was shaped less by the daunting economic and political challenges facing China over the next decade than by bitter personal and factional rivalries within a secretive Party elite.  In a surprise move, Mr. Xi replaced outgoing Party chief Hu Jintao as head of the powerful Central Military Commission, which controls the armed forces, making Mr. Hu the first Communist Chinese leader to cede all formal powers without bloodshed, purges or political unrest. But the new leadership lineup did not include the two figures with the strongest track record on political reform, dimming prospects that a new generation of rulers is committed to tackling vested interests within its own ranks." In other words and just like after the US elections - to quote the announcement during every 2:15 FOMC release from now until eternity - "no change, repeat, no change" (and the SHCOMP closing down 1.22%, and the Hang Seng down by over 1.5% more or less confirmed this). An interactive infographic of who's the new who in China can be found here, while a summary of what this means and what to expect are here and here

Elsewhere, the other main event was the formal announcement that, as everyone certainly expected, Europe officially is now in a recession. The euro-area economy slipped into a recession for the second time in four years, with GDP falling 0.1 percent in the third quarter. The official start date of Europe's recession is now Q3 2011. And with October Eurozone CPI pushing at a perky pace of 2.5%, one can add stagflation to the official list of terms haunting Europe.

Putting the cherry on top on the neverending European gongshow was the rumor by El Confidencial that Spain was finally going to request a bailout, promptly denied by Deputy Economy Minister Latorre, but not before it already managed to serve as the predefined catalyst for the BIS to buy some more EURUSD, using that as a levered fulcrum to push risk higher despite another session of horrible economic news.

Speaking of gongshows, Greece's Samaras said the country would resume growing in late 2013. Since by then there will be about 10 Greeks left, who will unilaterally decide not to enforce a moratorium on the country's then ?% debt/GDP, this is probably a realistic assessment. As for the Greek bailout wire transfer being sent by Germany any time soon: keep hoping Greece, keep hoping...

In Japan, the opposition (LDP) leader Abe, who is likely to replace Noda at the next election, called for unlimited BOJ easing, proving that Bernanke fever is spreading (and that central bank independence has been a myth since day 1). Sadly, even the Fed has shown that 2 months after the QEternity announcement, it is more powerless than ever to dictate asset prices, and inflation expectations (especially with the Fed monetizing the primary signal of long-term inflation - the 30 Year).

Finally, and in a development that can't be blamed on Hurricane Sandy, UK retail sales missed massively, dropping -0.7% ex auto fuel and -0.8% with fuel, on expectations of a -0.1% drop for both, and down from 0.5% last for both again. The news was greeted with a fresh jump in the EURUSD on hopes horrible news is again good news, and that despite the BOE's warnings that its toolkit is empty (if not running out of "tools", it has plenty of those), that QE4 may just come and lead to at least a 15 minute boost in risk. That or just another BIS fat finger.

Key events to look for today, via SocGen:

JPY selling continues to overshadow market activity as a pre-election statement from LDP's Abe for ‘unlimited BoJ easing' is causing a rush of positioning adjustment especially in the volatility space where short-term maturities have been bid up aggressively over the last 48hours.


Stronger Q3 GDP data from France and Germany were reported this morning and helped to steer EUR/JPY through 103.00. USD/JPY pierced 80.65 Fibo resistance to scale an 80.95 high, the highest level since late April. The 1.9% bounce in the Nikkei looks set to dictate risk sentiment in Europe today where the EU GDP and CPI data will be released and will provide matter for discussion on the next ECB move. Dovish rhetoric from the FOMC and BoE over the last 24 hours show credit easing policies are likely to remain an important theme is early 2013 and one can expect the ECB to keep easing expectations alive at the next meeting in December when it revises its real GDP and CPI projections. Though a technical led back up in longer dated yields and steeper curve is possible on short-term equity market (and Greece?) relief, the outlook for curves to stay flat should not change meaningfully , something the latest flare up of the Middle east conflict will only reinforce. We are keeping a close eye on the energy complex as Brent crude edges up towards $111.9, the 200d ma.


Focus today will be on the Q3 GDP data (Italy and EU still to come) and French bond auctions. In the US a busy schedule features first tier data including retail sales, initial claims and the Philly Fed. Fed chairman Bernanke speaks after the European market close. The dovish set of FOMC minutes released last night took nothing away from our expectations that asset purchases will continue next year.

A less snarky, and more detailed summary, comes as usual, from DB's Jim Reid and team

It’s fair to say that its generally been a good year for risk especially for credit and financials. However for all the excitement the risk tone has been stalling since QE3 was announced and has taken a turn for the worse since Obama's re-election. Indeed last night the S&P 500 (-1.39%) and DOW (-1.45%) closed at their lowest levels since July 25th and June 26th and they are now at levels they first cleared in 2012 on February 16th and January 18th respectively. The fiscal cliff is clearly the main concern at the moment. On Tuesday, Obama's tweets sent the markets lower into the close and last night his press conference had the same impact as he stated that although he is open to “new ideas” he remains opposed to extending Bush-era tax rates for those earnings above $250,000 and that said it would be “very difficult” to raise revenue by eliminating tax loopholes as suggested by the Republican camp.

It was interesting listening to DB's Frank Kelly's call last week where he said that Obama's attitude in his first 10 days post election would be key to understanding how conciliatory he would be as he commenced 'cliff' negotiations. So far we've not really had much compromise from either side. There's still time but it’s not difficult to see why the market is nervous.

The flare up in the Middle East didn’t help market sentiment either. Israel announced that it was willing to expand its operations against Palestinian group Hamas in the Gaza strip, and follows the death of the head of the military wing of Hamas, al-Jabari, who was killed yesterday in Israeli airstrikes. According to the BBC, Obama and Israeli PM Netanyahu agreed that Hamas needed to halt its attacks on Israel before the situation will de-escalate. Crude futures were up more than 1.1% yesterday, and Brent continues to be supported this morning, up a further 0.15%.

On a more positive note, the FOMC minutes showed committee members were open to the idea of QE4, although that failed to provide a floor to risk last night. The minutes noted that “Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program (Twist) in order to achieve a substantial improvement in the labor market.”. Furthermore, the minutes noted that the broad consensus in favour of adopting data-driven thresholds, under which the Fed would begin to remove accommodation as described by vice-chair Yellen on Wednesday.

In China, Xi Jinping and Li Keqiang were confirmed overnight as the President and Premier respectively, as expected. The other members of the seven-seat Politburo Standing Committee were also named - of which the make-up will disappoint those in the market hoping for greater representation from reform-minded individuals. Notably, the relatively market-friendly Wang Qishan was named head of the anti-corruption commission, which may disappoint some who were hoping his background as a former banker would be better suited to a more prominent role overseeing economic reforms. Meanwhile, the reform-minded candidates Wang Yang and Li Yuanchao were not named among Politburo Standing Committee members.

Turning to the overnight markets, Asian markets are trading broadly lower led by losses on the KOSPI (-1.16%) and ASX200 (-0.89%). The Nikkei (+1.75%) is bucking the regional trend on the prospects of an early election in December. Reuters notes that the opposition Liberal Democratic Party, led by former PM Shinzo Abe, currently leads in opinion polls. Abe has advocated that the BoJ continue “unlimited easing” until 3% inflation is achieved (vs the BoJ’s current 1% target) and has previously stated that if his party is returned to power he would consider revising laws to allow the government to have a greater say in shaping central bank policy (Nikkei). It’s not inconceivable that Governments do this type of thing in our countries in the years ahead. We might be past the peak point in terms of independent central banks. The USDJPY spiked 0.7% higher overnight on the Abe headlines, and follows yesterday’s +1.1% move. Meanwhile, the Australian dollar is holding steady against the greenback overnight, after losing 0.6% in yesterday’s US trading.

The day ahead will see the release of Q3 GDP numbers for the Eurozone and retail sales in the UK. In the US, the main data points to watch for include the PMI surveys from NY and Philadelphia, CPI and initial jobless claims. A number of Fed speakers are due to give speeches today but the highlight will be Bernanke’s talk on the housing and mortgage market. On the micro side, Wal-mart and Target both report Q3 earnings today.

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WaEver's picture

On a more positive note, the FOMC minutes showed committee members were open to the idea of QE4

So there's still (fairly well paid) idiots out there who view money printing as positive.

Snidley Whipsnae's picture

And while the FOMC is considering more QE China is purchasing PMs as fast as possible...

Interesting comments from Eric Sprott on BlabBurg...

GetZeeGold's picture



They'd have to be crazy to be holding paper in this environment.

Snidley Whipsnae's picture

getzeegold... agreed. Perhaps 'we' would have to be crazy to be holding paper in this environment... ?

We need paper for everyday transactions but for wealth preservation there are few assets that have performed as well as gold for the past ~ decade.

I like all commodities. Tough to hold phys oil, etc...

Stock Tips Investment's picture

Generally, the Stock Market is ahead of the curve. At present, there are many important factors in the political and economic life in the world. The situation in Greece, the bailout of Spain, the recession in the Euro zone, the new monetary policy in Japan, the political changes in China, Middle East, etc.., Etc. .. We live in a changing reality and destabilization. If the stock market is currently showing a significant drop, it is because the market is "moving forward" to negative circumstances. We expect that the Fed and the ECB's friends try to take measures to prevent further deterioration. What measures?. Whatever they see fit. They may do this?. Probably yes, in the short term. However, it is very worrying deterioration in technical terms, showing the stock market.

HedgeAccordingly's picture

The Colbert Report Talks High Frequency Trading | 

Cookie's picture

Wang Qishan (banker) was named head of the anti-corruption commission


Steady as she goes on the corruption front then

Matt's picture

What is worse than an economics degree? An economics degree from North Korea. Zhang Dejiang. Hopefully, by now he's forgotten what he learned there.

Sandmann's picture

The People's Republic of China is the main cause of the global imbalances which have brought the global economy to collapse.

Clinton had been the subject of heavy lobbying by American business interests and his economic advisers to continue China's trade privileges. With China now the world's fastest growing economy, the United States exports $8 billion a year there, which sustains up to 150,000 American jobs. Many major American businesses see even greater potential in Chinese markets, expecting China to become a massive purchaser over the next decade of the phones, electronic gadgets and thousands of other products made in America.

The US now has such a trade surplus on electronic gadgets with China that those Apple factories in Cupertino must be working 24-hour shifts !

He acknowledged that the one sanction he was imposing - the ban on imports of guns and ammunition from China involving about $200 million in sales - constituted little more than a "discrete" symbol of U.S. displeasure. Most weapons are made by the Peoples Liberation Army, agent of the 1989 crackdown that set off congressional calls for revoking China's trade status.

Clinton is of course right to prevent Chinese guns entering US markets and will no doubt have a trade surplus in selling US military equipment to China if their spies don't loot it first !

plaspotje's picture

the 3 trilion china has horded is peanuts compare to the 21 trillion the rich have been hording and the  16 trilion the usa government has been overspending and the 16 trilion euro government have been overspending  and we do not even want to talk about the wallstreet event  that cost the middle class 2 arms and 2 legs ,,,  go long  eye controled wheelchairs

orangegeek's picture

The Chinese communists do well when there is no competition.  It's interesting that the Shanghai index topped in 2009 and had a lesser top in 2010.


Europe stagflation?  How about deflation?


And the US?  Deflation too.  A sympton of this is falling prices.

youngman's picture

I think the China news is much bigger than we know....they play for 10 what is there 10 year will probably scare you

fonzannoon's picture

Gold getting hammered because there is no news on QE5.

GetZeeGold's picture



Mien Fuhrer we've held back the Russians......for now. Should have taken the SS advice to buy AAPL.

Urban Redneck's picture

B/c yesterday's assault failed, they regrouped, reinforced, and re-attacked.  PM's are still the land of tranquility compared to the oil ptis.

dvsteenk's picture

Meanwhile CAC40 has become the most manipulated index, today another fake castle was built out of thin air on top of the 3360 line... to crumble soon


timbo_em's picture

Tyler, why do you almost always use debt/GDP to measure the hopeless indebtedness of a country?

One is stock, the other one is flow. To me (yes, I'm an academic) that makes little sense. I suggest using interest payment as a percentage of government revenue plus the ability to increase government revenue (the latter, of course, is pretty much zero for all the PIIGS).

Tyler Durden's picture

Perhaps address your question to Rogoff (also an academic) for whom the "stock" barrier of 80% Debt/GDP is game over. Oh, and stock matters quite a bit when the Fed's attempt to manipulate flow via low interest rates finally fail. Have fun rolling 230% debt/GDP (i.e. Japan) then. But don't worry, just because there hasn't been a rate revulsion yet, it means we will never have one.

As for the charts you request, here you go:

timbo_em's picture

Thank you, Tyler!

It wasn't my intention to say that stock is irrelevant. But one can also observe the impact of rising interest rates (once manipulation is no longer possible) when looking at the interest payments rather than total debt.

ngrySpaniard's picture

Good morning Europe!

Obviously those kids were against a free, independent Catalonia...


Awaiting Karma Police


virgilcaine's picture

The market will force a solution to the Eu crisis, the polititicians will be dragged along kicking and screaming.

plaspotje's picture

and what keep this euro from not falling 1 to 1 dollar  , other places worse than europe ?

JenniferS's picture

Im sure much more than two third of EU countries would vote against the EU. The only organisations that profit from the EU and want the EU badly are banks and the IMF. Without the EU it wouldnt be so easy to keep so many counties in the DEBT TRAP. Its not Spain or Italy or other EU member counties that you have to hate people, its the banks that caused this mess in the first place. It wasnt these counties choice to be in a debt trap where they only can pay their cash loan interests...