Archives par catégories : GLOBAL MACRO

Day to day Global Macro Context Analysis

Commodity prices: what we would like to see, what hints they are giving

par

Commodity prices: what we would like to see, what hints they are giving

We got off on a good foot this week, with some reassuring news for once: the likely decline in oil prices stemming from progress on negotiations to halt the development of nuclear weapons in Iran. As we are reasonably confident that this week’s agreement will have an impact of at least $10 per barrel, we decided to take a closer look at what is, at first glance, good news for the world economy.

So, why don’t we just take the news at face value?

Is France doing as poorly as everyone says?

Coming on the heels of last week’s dispiriting PMI data, the results of the latest INSEE survey are reassuring. Not only do the results debunk the scenario of a slide back into recession that some were quick to assert after the PMI release, but a detailed analysis even shows that there is reason for hope.

 

The three reasons we do not see QE ending

par

The three reasons we do not see QE ending

Statements by Ben Bernanke and the release of minutes from the most recent FOMC meeting have erased any doubt sparked by the Fed’s September 18 change in communication, reinforcing expectations that asset purchases will be tapered. Most observers now think the tapering will come in March. We remain wary of the consensus for three main reasons. The first is our view of current U.S. economic trends, which we do not see improving enough to meet the Fed’s stated targets for growth or inflation in the coming months. The second is the inevitable effect that QE tapering would have on long-term interest rates, which the economy is still too weak to withstand.

How long will the last of Frankfurt’s safeguards hold?

The writing was on the wall: the ECB would have to do more as the hour of the Fed’s QE tapering approached. Here we are. Whether or not the Fed goes through with it – our previous article showed that we do not think it will – expectations of a reduction in asset purchases are already having a huge effect on markets and capital allocation around the world. By drying up the market for Treasury bonds, the Fed has been diverting capital flows from U.S. markets into numerous other assets for more than a year now, most notably into emerging and euro zone sovereign bonds. By tapering its QE, the Fed would restore the U.S. market to its rightful place, thus creating the conditions for investments to flow back into the U.S. Emerging markets and euro zone sovereign markets are thus particularly vulnerable to any change in the direction of Fed monetary policy.

The ECB could use Janet!

par

The ECB could use Janet!

What a difference a week makes – between Mario Draghi expressing apparent relief at having wrung a 25 basis point rate cut out of the ECB monetary policy committee he chairs, and future Fed Chairwoman Janet Yellen, who in confirmation hearings before the Senate left no doubt that the Fed is not yet ready to reduce its level of support to the U.S. economy. Even more tangible than this contrast is the sense of frustration that many are feeling on this side of the pond. The ECB President is no Janet!

Did you say deflation?

After three years of policy that has been deflationary in every respect, the sudden panic triggered by weak euro zone inflation numbers comes as a surprise. The tone was set way back in 2010 with the adoption of the European Commission’s Stability Programme and the song has been the same ever since as the sovereign debt crisis deepened.

Fiscal Cliff, Sequester, Shutdown: What Next?

par

Download

The latest showdown in Washington raises a whole host of questions and conjectures about what will come after the agreement struck yesterday by the U.S. Senate. A closer look at the most crucial issues involved is therefore in order.

From Political Farce to Economic Instability

Viewing the federal government shutdown of the past two weeks as political farce may help mitigate the gnawing anxiety over how large a threat it represented to the world economy. In fact, however, this most recent tug-of-war has thrown a new quandary into bold relief: the economy is increasingly at the mercy of politics at its very worst. In other words, our economic future may be shaped by partisan wrangling, even of the most ludicrous variety. This is not just an umpteenth American specialty, either. It is a tendency inherent in the lingering crisis that has bedeviled the advanced economies for over five years now, and it introduces a new kind of risk—unpredictable, uncontrollable risk with the potential to wreak havoc. While the too-big-to-fail syndrome may still look like it can shield us from the disaster scenario—federal government default—we would be well-advised to brace ourselves in this new phase for serial drama over the issue of U.S. sovereign debt and fiscal policy.

Plenty of room for more political strife. 

How much fiscal tightening in 2014? 

When will the downgrade occur?

What rates? What policy from the Fed?

What does it all mean for growth? 

A Fresh Round of Central Bank Action Coming Up in 2014

par

Download

If we’re correct in assuming the Federal Reserve is not about to start scaling back its asset purchases, worldwide liquidity injections should hit a new high next year. Whereas the aggregate balance sheet of the four leading central banks showed little change in the first half of 2013, we can expect widespread central bank activism over the next few quarters:

  • At a rate of 85 billion dollars a month, the Fed’s asset purchases should amount to 1.02 trillion dollars a year.
  • The Bank of Japan will be adding anywhere from 600 to 718 billion dollars to its balance sheet as it strives to meet its target of expanding Japan’s monetary base by between 60 and 70 trillion yen a year (making it some 40 percent larger than at the beginning of 2013).
  • The Bank of England will be buying 610 billion dollars’ worth of Gilts in connection with its objective to purchase 375 billion pounds of assets via its Asset Purchase Facility.
  • The ECB’s probable upcoming LTRO is likely, in our estimate, to provide Europe’s banks with between 250 and 500 billion euros, or 350 to 750 billion dollars.

The “Big Four” should thus be injecting a cool 1.6 to 2.5 trillion dollars into the system in annual terms (at a pace of 135 to 208 billion a month). This should continue, if not throughout 2014, then at least through the early part of the year. In the low-case scenario, that would equal 10 percent of American GDP; in the high-case scenario, it would equal almost the entire size of France’s economy in 2012! But whether the ECB follows suit or not, the annual flow of fresh liquidity should return to the highs seen in 2011 and 2012—and for the ECB’s LTROs, could even set a post-2008-crisis record.

How Far Will the Dollar Fall Now?

par

Download 

Over the past few years, we have been resolutely bearish on the dollar, in contrast to the consensus view. The reasons behind our contrarian outlook are three-fold:

  • We foresee lastingly low GDP growth now that the 2008 crisis has brought an end to the support previously provided by private sector debt—creating a shortfall we estimate at 1.8 percent a year, and pushing U.S. potential output down from its pre-crisis 3.0–3.2 percent range to somewhere between 1.5 and 2 percent today.
  • We expect the Federal Reserve to stick to its unconventional monetary policy for now and the greenback to continue losing ground as a result. To make matters worse, the euro area has opted for a structurally deflationary policy mix to sustain the euro, even if that means undermining European industry.
  • We anticipate an eventual inflationary exit from the 2008 financial crisis—one that will almost certainly affect the United States much sooner than the euro area.

These factors also prompted us to cut our projections for the dollar in June, when we simultaneously lowered our 2014 forecast for the U.S. economy—and thus for long-term Treasury yields as well. Although challenged by developments since the early summer, our bearish dollar outlook seems once again pertinent in the wake of this week’s FOMC meeting.

So just how low might the dollar fall?

 

 

The Fed Plays for Time—Predictably

par

Download

“The first increases in short-term rates might not occur until the unemployment rate is considerably below 6.5 percent”!  Ben Bernanke, Sept. 18, 2013

The Fed has dared to act contrary to expectations—and rightly so. This was no easy move, given that since early summer the markets have talked themselves into believing that central bank policy was about to change. Yet the reasoning behind the FOMC decision couldn’t be clearer:

  1. The U.S. economy is still on extremely shaky ground. Growth has yet to pick up; job gains remain mediocre; disposable income is still too low to drive a lasting recovery in consumer spending; and businesses are not investing.
  2. Yields have risen so sharply since the start of the summer that they have come to pose a threat to growth, as demonstrated by the sudden halt to the housing market uptick since the spring.
  3. The lower jobless rate doesn’t reflect improvement in labor market conditions. If anything, it shows that they have continued to get worse. The labor force participation rate is in free-fall—in other words, more and more working-age people are simply dropping out in discouragement.
  4. Fiscal policy is highly restrictive and will remain so—just when implementation of health-care reform prior to year-end is likely to take a large bite out of personal income.

Today’s announcement has major implications

…