Europe:
Last week's ECB press conference was notable for how hawkish it was relative to expectations. Which has TMM wondering if this is actually a glimpse of a deeper policy that would go a long way toward explaining the ECB’s inactivity. That is that the ECB recognizes that one of the key misalignments in the Euro area is productivity-adjusted labor cost differentials. Even after the recent crisis, Germany labor costs remain very competitive vs those of other Eurozone countries. As long as that persists, Germany will have a high trade balance and negative capital balance with its EU neighbours. In other words, German capital will continue to finance Germany exports.
Now, within a currency union, the smoothest way to normalise this gap is over time via differing inflation levels within the EU over time. In particular, if German labor cost inflation exceeds that for rest of EU for sufficient time, real labor cost differentials will shrink. To us, this appears to be the path the ECB is taking.
If this is the case then it is worth noting that since Germany is much smaller than half of the EU, this policy stance by definition would mean very low inflation in EU ex-Germany, and as a result low inflation prints for the Eurozone as a whole. In other words, the ECB WANTS low inflation prints for the Eurozone as a whole because it signifies that the labor cost differentials are narrowing. The ECB’s implicit acceptance of a long period of below target inflation (via its staff forecasts) is reflective of that. As a result, as long as inflation expectations remain anchored, TMM thinks the ECB is likely to continue its current policy of non-action. Whether inflation expectations will remain anchored, however, is a whole other story altogether. But the lack of action was the removal of one risk support.
US: The ISM print last week was obviously the big shocker, but TMM thinks that it overstated the drop, just as the previous prints near 57 probably overstated the real improvement. Weather remains a large factor clouding many recent data point and TMM thinks it will be some time before that is cleared up. On the bright side, barring a more severe mid-cycle slowdown, there isn’t a great deal of room for the ISM print to fall further from here. But it was the NFP that was the main headline. There was something in there for everyone. Poor headline for the bears and yet stunning households for the bulls. As usual the one that is touted most is the one that supports the following price action. As stocks shot up it was classed "Boomshakalaka"!
Momentum - This week has started though with a dramatic fade in momentum. The rate of rally in US markets into their close had us looking for a reasonable follow through in Asia, but overall it was pretty unimpressive and we were interested to see USD/TRY, USD/ZAR and gold all moving higher. The gold component particularly noticeable. So whilst we remain fundamental bulls for equities and EM the speed of the return of TRY and ZAR moves, as HF bullies give them another beating, combined with the rapid decline in DM equity market momentum has us trimming our longs and playing a turn down for the next couple of days giving us another dip to buy on, but whilst folks love to correlate everything (usually wrongly) in market slides we won't stand in the way today.
TMM also have a friendly bet that if mrkets do indeed start falling today the NFP corpse will be rewrapped in its "bad news" clothes and wheeled out as evidence.
Talking about dips to buy on, here is our favorite chart du jour. -
How exciting for all those lucky bitcoiners! Yet another dip to buy on! We've said it before. Railroads of the late 19C. The ideas are good but that doesn't mean you will make money owning the first iteration. One aside, with gold rallying and bitcoin dumping could we be seeing the "log cabin" switch taking place where large swathes of Montana are switching out of surefire Bitcoin back to surefire Gold? Of course not, but someone is bound to seriously suggest it (buy shares in gold coin retailers in mountainous States).
Oh and finally we just have to give credit to the genius "Gigawipf" who gave us the floppy disc orchestral version of Soft Cell's "Tainted Love" which we make today's "playing out" music.
3 comments
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Replyhmm
"Do you know something that I don't"
- Frankie Four Fingers
another notable, from Yves Smith:
ReplyOne negative sign is the definitive repudiation by the German High Court of the ECB rescue device called the OMT. Now on a practical level, this probably has very little near-term significance. The OMT was a clever move by Draghi to take existing powers and rebrand them to stare down on of the regular upheavals that used to plague the Eurozone. The headfake was astonishingly successful.
A German case challenging the OMT was decided by the German constitutional court last week. A very superficial reading would say the ECB won, since the German High Court referred the case to the European Court of Justice. But reading the ruling shows the reverse, that it was a blistering smackdown of the OMT. As Ambrose Evans-Pritchard wrote Friday evening:
The tough language leaves it doubtful whether the ECB’s back-stop scheme for Spanish and Italian bonds can be implemented if Europe’s debt crisis blows up again, and greatly complicates any future recourse to quantitative easing if needed to head off Japanese-style deflation.
The German constitutional court refrained from issuing a final ruling on the legality of the plan, known as Outright Monetary Transactions (OMT). It referred the case to the European Court instead, but only after having pre-judged the issue in lacerating terms that effectively bind German institutions. “The Court considers the OMT decision incompatible with primary law,” it said.
“This is a massive attack on Europe’s rescue strategy. I do not know whether the markets have understood this yet,” said Clemens Fuest, head of Germany’s ZEW Institute.
The usually-measured Wolfgang Munchau of the Financial Times was even more negative:
On Friday the German plaintiffs who brought the case were celebrating. It is not hard to see why. If you read past the first 15 pages of procedural jargon, you find the court concludes that OMT violates the German constitution. It accuses the ECB of making a power grab by extending its own mandate. It says the scheme endangers the underpinnings of the eurozone rescue programmes. Worse, it says OMT undermined deep principles of democracy. Were it to be used, it would deprive the German parliament of its fiscal sovereignty by forcing it to accept any losses the scheme generated. The ruling considers OMT to be debt monetisation, whereby a central bank prints money to finance sovereign debt. It is hard to think of any act short of a military coup that could violate so many important constitutional principles all at once.
now you've all been warned
Thanks for that note, thoroughly enjoyed it. It's a shame the rhetoric coming out of the ECB chairman these day is not a stamp on it's predecessor. My ECB coverage of meetings is now effectively rendered and I cannot describe to you how relieved one is to not put oneself in a situation of ineffable desolation while sitting around waiting for the unknowable,anymore.
ReplyDecades of cryptic rhetoric has come to an end in the sphere of CBs, and I feel it's for the best , with this particular one.
If I ever meet any of our past nonpareil ECB bankers I'll be sure to say to him ..." HOW THE FUCK DID YOU THROW ME INTO THAT"