While the overnight session has been relatively quiet, the overarching theme has been a simple one: currency warfare, as more of the world wakes up to what the BOJ is doing and doesn't like it. The latest entrants in global warfare: Taiwan, whose central bank overnight said it would step in the FX market if needed, then Thailand, whose currency was weakened on market adjustment according to Prasarn, and of course South Korea, where the BOK said that global currency war spreads protectionism. Last but not least was China which brought out the big guns after the PBOC deputy governor Yi Gang "warned on currency wars ." To wit: "Quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows,” Yi, who is also head of China’s foreign-exchange regulator, told reporters. “Competitive devaluation is one aspect of it. If everyone is doing super QE, which currency will depreciate?” “A currency war, a series of tit-for-tat competitive devaluations, would trigger trade protection measures that would damage global trade and therefore growth globally,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong, who previously worked for the World Bank. “That would not be good for any country with a stake in the global economy.” Which brings us to the fundamental question - if everyone eases, has anyone eased? And is there such a thing as a free lunch when central banks simply finance global deficits while eating their soaring stock market cake too? The answer, of course, is no, but we will cross that bridge soon enough.
European news overnight was as usual bad. As SocGen reports, Euro area M3 growth slowed sharply in December, with M3 deposits declining by €42bn on the month. This almost certainly reflects a reversal of the flows seen in October when national subscriptions to the paid-in capital of the ESM temporarily boosted overnight deposits. As this capital progressively get re-invested, overnight deposits fell back by €32bn in December. This is an effect that we were expecting to a certain extent, although the timing of the flows was difficult to gauge. As a result annual euro area M3 growth fell back to 3.3% y/y, down from 3.8% in November. Lending growth however remains very muted with loans for house purchase growing by a measly €3bn on the month (up 1.3% y/y) while lending to non-financial corporations dropped by €51bn. That's the biggest ever one month net repayment of M3 lending and takes the annual growth in lending to non-financial corporations down to -2.3%.
Next Italy, where things at least form a consumer confidence standpoint have never been worse: despite the easing in financial market tensions and the prospects of an election, the underlying weakness of the Italian economy was again underscored by another sharp fall in consumer confidence. This slipped another 1.1 points in January, dropping to 84.6, which is another record low for the series. The sharpest declines were again experienced in the indices for current family budgets and propensity to save which again testifies to the weakness in personal sector real disposable incomes which we estimate probably fell by around 5% y/y in Q4. These latest numbers therefore show no sign of any improvement in momentum heading into the New Year.
The number of new Spanish mortgages rose by just under 300 in November to 31,697. This is only fractionally above October's outturn which surpasses the previous low in housing market activity and left the number of mortgages down 30.5% y/y.
Finally a quick preview of the busy week - it's going to be a week of being bombarded with data and earnings from all angles. This week will see the first reading of US Q4 GDP as well as the first FOMC statement, Payrolls and ISM print of the year. In Europe we will get a handful of confidence indicators in the earlier part of the week but the main highlight will be the Spanish and Italian manufacturing PMIs on Friday. The earnings season continues on in full swing with 122 S&P 500 and 45 Stoxx600 constituents reporting this week.
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There has been lots of talk over the last few days about 'currency wars' and a couple of things caught our eye over the weekend. Firstly upcoming BoE governor Mark Carney suggested at Davos on Friday that monetary policy was far from "maxed out" and that "for monetary policy, the immediate priority is to ensure (economies) reach escape velocity". He also seemed to hint that there was some flexibility for inflation being above target for a period of time. To be frank the UK has seen inflation above target for most of the last 6 years so nothing new here but one can deduce from this speech that the UK will not be a laggard in monetary policy when the new governor enters his new office just down the road from mine in July. Talking of laggards, the ECB's continued lack of pre-emptive action (only a bazooka in the background) continues to make the Euro the currency of choice. That their balance sheet will start to steadily shrink this week due to the LTRO repayments is also a contributing factor in showing the contrast between the major central banks. Last week the Euro hit an 11, 22, and 19 month high against the Dollar, Yen and Sterling.
There was also a lot of discussion over Japan’s aggressive policies as Davos ended over the weekend. In an interview, the Bank of Korea’s Governor Kim said that the BoJ move was done in a hasty manner and would lead to large movements in the FX market.
Japan’s economy minister Amari defended the actions and told the forum that it was up to the market to determine the FX rate and the BoJ had chosen independently to sign a joint statement with the government to flight deflation and revive growth. IMF’s Lagarde joined the debate by saying that “Japan has made very important decisions. We are very interested in these policies. We would like them to complement it with a mid-term plan on how the debt would be reduced”. Separately, a long-time advisor of PM Abe, Takenaka told the WSJ that the correction in the JPY has just started and it is not fair to say that the JPY has depreciated too much. The possible candidate for the next BoJ Governorship also said that many see 95 yen to a dollar as a desirable rate (currently 91.05).
On that note the JPY devaluation theme has been a major focus for Asian markets accompanying increasing chatter on Korean Won outflows. Indeed the KRW cheapened 1.6% against the Greenback last week to make it the biggest weekly fall since May last year whilst the KOSPI is currently the main laggard in Asia with a -3% YTD performance. As our Korean rates strategist noted, what matters for Korea today is growth and a competitive devaluation of the yen threatens its recovery. This sets up the stage for the next BoK rate cut and as for timing our strategist think the central bank may opt for a “coordinated” rate cut in March, when the new government takes office and announces a fiscal stimulus package. The timing could be brought forward though if the pressure on the won worsens.
The Nikkei has had a fantastic run since the middle of November though after posting its 11th weekly gain last week, which also was the longest weekly streak since 1973. Elsewhere the UST 10-year yield is steady overnight at 1.949% after having spiked by 10bps on Friday.
Previewing the data flow ahead we will kick off with durable goods orders, pending home sales and the Dallas Fed manufacturing survey today. Tuesday will be a quiet data day in the US before we get the first take of US Q4 GDP on Wednesday. The two-day FOMC meeting also concludes on Wednesday but no major policy changes are expected and there also won’t be a Bernanke press conference this time. Personal income and spending numbers are due on Thursday as is the Chicago PMI. All these before we arrive at a blockbuster payrolls and ISM Friday. In Europe we will get Italian consumer confidence numbers today followed by French consumer confidence and Spanish retail sales on Tuesday. Spanish flash GDP for Q4 is out on Wednesday as well as a bunch of Euroland confidence surveys. Germany’s labour market update and inflation numbers are due on Thursday before we get to the closely watched PMIs on Friday.