Keeping The Faith With Strategic Alpha

From Maurice Pomery of Strategic Alpha

Keep The Faith

PMI data is finally seeing analyst’s waking up to the fact that global growth is falling. AUD exposed and rate cuts coming:
Finally it is dawning on mainstream analysts that the threat to global growth forecasts is real. It’s taken a while but it seems they are getting it now. The PMI data has always been a good indicator for me and wherever I look we seem to be in contraction and to my mind European and developed world’s PMI’s have started a cyclical fall again and will compound the problems facing those fighting the deficit issue. PMI’s for the Euro region fell to 47.4 in April, against 49.1 in March, well below market expectations (49.3) to reach its lowest level since November 2011. Even assuming no change in May and June, this would be consistent with a contraction in GDP of 0.3% qoq in Q2, down from -0.1% qoq in Q1.  Germany is not escaping this either as the manufacturing PMI was a bit of a shock to some. The drop in the German manufacturing PMI was driven by declines in most of the components and so I suggest that forecasts for growth in Europe are actually still too high!
This, plus the on-going austerity culture in governments will see growth and thus demand fall further as we have discussed many times and this will hit exporters very hard indeed and encourage more of the deleveraging process by the consumer. Global growth forecasts will shift lower and this will leave the commodity bloc exposed as we have thought for a while now. Looking at Brazil and India it is clear that concerns about their respective economies is affecting policy as rate cuts are coming thick and fast. The world is slowing down and this will impact policies at all the developed world’s central banks including the US.
The AUD is still set for much lower levels in my view and will take the Kiwi with it whilst the CAD may lag. Markets are beginning to price in nearly 100bps of cuts in Oz this year and to me there is a very real chance that the forward looking RBA may cut 50bps in May to nip any threat of deflation in the bud as it is clear that the domestic market is straining with property markets soft and inflation falling quite fast, let alone what is going on globally with regard to demand. The RBA are very aware of the global situation and are prepared to be pro-active. China is slowing, albeit in a controlled fashion so far but the data suggests a seismic shift in attitudes towards economic health around the world. To me the rot has been there for a while and may surprise a few to see how deep this runs.
The continuing burden on the global economy from the EU continues and I note with interest how close to the core this has got. France and the Netherlands are becoming a real concern and it doesn’t get more core than that! Money is fleeing France as the wealthy fear Hollande’s tax targets and there is evidence that this money is showing up in London property. The Dutch government has collapsed on the back of budget issues and a long battle could delay dealing with the problem and spook bond markets. Neither France nor the Netherlands can afford higher yields. If the core gets targeted then the likes of Italy and Spain are in trouble. Markets are scared of the mess in Holland and are rightly concerned where a Sarkozy loss will leave the EU leadership. The fact that the EUR is manipulated and held at ridiculously high levels has the negative effect of forcing traders into selling EU bonds and equities and the divergence (or the break in correlations) is becoming extreme.
The US will fail to deal with the deficit any time this year: So says former Fed VC Kohn:
Finally someone apart from me is highlighting the massive issue of the US election and the fact that it will delay any attempt to deal with the debt issue anytime in the US this year. This has to be taken more seriously but it gives macro managers a chance to position for the fact that the UD debt ceiling will likely be hit just before or just after the election, which is THIS year. Whoever is in government after the election is going to have to realistically sit down and tell the American public that benefits will be cut deeply, workers in the public sector will be let go (adding to the unemployed numbers), taxes will rise and hardship lies ahead. I am not sure the American people can take such a shock. The reality is that they seem completely unaware of what is coming.
The problem is no campaigner can win on this ticket so forget anything but promises to spend more and make life easier for the electorate. That is going to be the biggest lie in history and we can see it coming. However the delay may spook a few of the bond vigilantes and possibly a rating agency if they are awake (unlikely). Kohn put it like this; “there is a real danger U.S. authorities won’t take the necessary steps to fix the country’s debt and deficit problems between the elections and the end of this year”, Kohn said Monday. “What’s required to put the fiscal deficit on a sustainable path are some difficult decisions having to do with entitlement spending and taxes in the United States.” “There’s a high degree of uncertainty and there’s a huge risk that they won’t.”
He went on; there is a real risk debt and deficit will continue to grow past the end of this year. He said governments worldwide must not rely on central bankers to get them off the hook for uncomfortable choices. “You cannot count on central bank purchases to bail out governments whatever the inflationary consequences.”  He has a point and the delay will be costly and the pain to fix the problem will be deep. The US faces a massive set of issues in 2013 and no one is talking about it.
Now here is the point; Bernanke thinks he can deal with this falling growth outlook and a deleveraging consumer by adding to QE to keep rates very low. I am not sure it will work and if it doesn’t yields could start to rise and the more he throws at it the more yields actually rise as vigilantes will fear pent up inflationary pressures. This is a potential disaster for central bankers and at some point the impact of QE may be proven limited. When it is the central banks will have shot the last bullet. Why is no one discussing this?


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