Thursday, January 29, 2015

The ECB Has a Challenge (excerpt)

The introduction of the euro at the start of 1999 caused bond yields to converge in the Eurozone as investors no longer distinguished between the credit risk of the different members of the monetary union.

The spread between both Spanish and Italian government bond yields versus the comparable German yield narrowed to zero during the previous decade. Spreads widened again at the beginning of the current decade, but narrowed significantly after Mario Draghi pledged to do whatever it takes to defend the euro on July 26, 2012.

ECB data show that loans to the Eurozone private sector soared by €4.0 trillion to a record €11.1 trillion from the start of 2004 through the end of 2011. As of November 2014, this debt measure was down to €10.4 trillion. In other words, the ECB’s various attempts to revive lending since the financial crisis have failed. That might be because borrowers are already maxed out on their ability to service more debt.

Today's Morning Briefing: How the World Works. (1) Two big questions. (2) Global liquidity doubles since start of 2009. (3) Easy money losing its effectiveness. (4) Debt-financed supply exceeds debt-financed demand, resulting in deflation. (5) Central banks doing more of the same and producing more secular stagnation and deflation. (6) The Greek solution to too much debt. (7) The death of the debt super-cycle. (8) Central banks messing with currency war. (9) The patient Fed. (10) Too many maxed-out borrowers in Eurozone? (11) Less bang-per-yuan. (12) Profit margin review. (More for subscribers.)

Wednesday, January 28, 2015

Ups & Downs for the US Economy (excerpt)

Yesterday was another up-and-down day for the US economy. On Monday, we learned that January’s Dallas Fed business survey suggests that the plunge in the price of oil is depressing Texas, the biggest oil-producing state in the US. On the other hand, plunging mortgage rates are lifting housing starts.

Yesterday, it was more of the same. Durable goods orders were weak, while new home sales were strong. Nondefense capital goods orders fell 0.6% for the second month during December. The weakest category is machinery orders, which declined 9.4% during the past four months. Leading the way down are orders for construction, industrial, mining, and farm machinery.

On the other hand, December’s new home sales data released yesterday showed a solid gain of 11.6% m/m to a new cyclical high. Even more impressive is the big jump in the Consumer Confidence Index this month. It soared from 93.1 last month to 102.9 this month, the highest since August 2007.

There was a significant drop in the percentage of consumers agreeing that jobs are hard to get to 25.7%, the lowest since March 2008. This series is highly correlated with the unemployment rate. If oil field workers are losing their jobs, that’s not having any impact on consumer confidence, which suggests that the job market is getting hotter.

Today's Morning Briefing: Yearning for Earnings. (1) Get ready, set, go. (2) The $120/$130 scenario. (3) Lowering S&P 500 target to 2150 this year and pushing 2300 to mid-2016. (4) Several factors weighing on earnings. (5) Not a zero-sum game. (6) Still waiting for usual earnings season upturn. (7) Industry analysts slashing 2015 and 2016 estimates. (8) Margin estimates falling. (9) Energy remains the biggest dead weight. (10) Durable goods are also heavy. (11) Consumer confidence is euphoric. (12) Focus on market-weight-rated S&P 500 Industrials. (More for subscribers.)

Tuesday, January 27, 2015

Global Economy Showing Some Signs of Life (excerpt)

Everyone’s been down on the global economic outlook. Both the IMF and World Bank have lowered their global growth forecasts for 2015 and 2016. There has been quite a bit of skepticism about the likelihood that ultra-easy monetary policies in Japan and now the Eurozone will do much to lift their economies. I have been skeptical as well. However, I am open to the possibility that surprises may be to the upside rather than the downside. On balance, the plunge in oil prices should be stimulative for the global economy. The same can be said for the plunge in bond yields.

The question is whether the devaluations of the yen and the euro will boost exports in Japan and the Eurozone. Maybe so, but their gain could be some other economies’ loss. In particular, US exporters could suffer if the greenback continues to strengthen. However, that could be offset by stronger US consumer spending and home building. In this light, consider the following upbeat indicators:

(1) Germany. Germany’s Ifo Business Confidence Index rose for the past three months through January from 103.4 to 106.7. That’s after falling for six consecutive months. The sanctions imposed on Russia seem to have hit Germany hard last year. Now the falling euro may be starting to boost German exports.

(2) Japan. Japanese merchandise exports (in yen) rose 2.0% m/m and 12.9% y/y during December to the best reading since September 2008.

(3) Copper. Given the improvement in US housing starts, German business confidence, and Japanese exports, the recent freefall in the price of copper may be overdone. Yesterday, it rose 4 cents to $2.54 per pound. My hunch is that the selloff may be over and the price should stabilize for a while.

Yes, but what about China? Some of the recent copper selling might have been attributable to traders lightening their positions before the Chinese Lunar New Year Holiday begins on February 19. Most businesses are shut from February 18-24; 2015 is the Year of the Sheep. By the way, Markit reported that China’s flash M-PMI output index rose from 49.9 during December to 50.1 in January, the highest in three months.

Today's Morning Briefing: Houston’s Problem. (1) Houston has a problem. (2) US oil wells still gushing. (3) Dallas Fed survey showing weakness. (4) US consumer confidence going vertically up as gasoline prices go vertically down. (5) Homebuilding boom could offset oil industry bust. (6) Is the gloomy consensus on global economy too gloomy? (7) Yergin explains it all. (8) Oil shale frackers are the new swingers. (9) The free market vs. the Saudis. (10) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

Monday, January 26, 2015

Q€ Is Mostly About Depressing the Euro (excerpt)


In the beginning, the Lord said, “Let there be light.” And there was light. Then in 2008, Ben Bernanke said, “Let there be NZIRP and QE.” And the Earth’s dark financial chaos ended as near-zero interest-rate policy and quantitative easing lit the way to recovery. Last week, Mario Dragi said, “Let there be Q€.” And the euro continued to plunge. Eurozone stocks continued to rally on hopes that Q€ will revive the region’s economy and avert deflation. If it works, light will replace darkness in the Eurozone. Currently, I’m not a believer, but I am willing to move from the dark side to the light side if I see some light at the end of the Eurozone’s economic tunnel.

The euro plummeted to $1.12 on Friday, the lowest since September 17, 2003, and down 20% from last year’s high of $1.39 on May 7. Now that the euro is trading more like the drachma than like the Deutsche mark, everyone seems to expect that it is heading for parity with the dollar, which would be a 28% decline from last year’s high.

I began to speculate about that possibility last summer. As I’ve noted before, Draghi first started talking the euro down at his 8/7 press conference last year. In his Q&A comments, he said that “the fundamentals for a weaker exchange rate are today much better than they were two or three months ago.”

Meanwhile, the trade-weighted dollar continues to soar, rising 2.4% since the start of the year and 13.6% since last year’s low on July 1. The EMU MSCI in euros is now up 7.8% ytd, following last year’s lackluster gain of 2.3%. It is outpacing the US MSCI, which is up 1.6% ytd following last year’s 11.1% rise. However, the EMU MSCI in dollars is up just 0.3% ytd following last year’s drop of 10.2%. As was demonstrated in the US and Japan, QE is bullish for stocks, but its stimulative impact on nominal GDP remains debatable.

Today's Morning Briefing: Q€. (1) After the darkness, there was light. (2) Euro is trading more like drachma than D-mark. (3) QE still lifts stock and bond prices. (4) Good to be a Bond King. (5) Paying for the privilege of lending money. (6) Still betting on one-and-done. (7) Draghi’s shock-and-awe. (8) Open-ended Q€. (9) Greeks vote, while ECB does not. (10) Eurozone stats still mostly stagnating. (11) Performance Derby. (12) “Birdman” (+). (More for subscribers.)

Thursday, January 22, 2015

Will QE Work for ECB? (excerpt)


Today, the ECB will detail a new QE program for the explicit purpose of averting deflation. Bloomberg reported yesterday that ECB President Mario Draghi favored spending as much as €1.1 trillion through asset purchases of €50 billion a month until December 2016, according to two euro-area central-bank officials.

It will be interesting to see how the QE program will handle loss sharing. According to an article in the 1/19 FT: “It is very likely that much of the burden for losses on sovereign bonds bought under QE will lie with individual member states, though there are various ideas about the exact role the national central banks will play. The losses are set to apply should a government pursue a debt restructuring or a default. The national central banks would be obliged to buy as much of their country’s debt as the ECB orders, though they may have some freedom over the sorts of maturities they buy.”

It’s not obvious that QE will revive inflation in the Eurozone given that it didn’t do so in the US. Perhaps inflation would have moved lower in the US without QE, though I doubt it. Given that government bond yields have plummeted close to zero in the Eurozone, QE’s mission has already been accomplished in the bond market, in my opinion.

The only transmission mechanism that I see between QE and inflation is through the currency. If the euro continues to plunge as a result of the new QE program, then the Eurozone’s economy might get a lift from exports and fewer imports. That could boost inflation, I suppose. However, I remain skeptical given Japan’s recent disappointing experience with quantitative easing.

Meanwhile, inflation continues to fall in the Eurozone. Thanks to falling oil prices, the headline CPI inflation rate was -0.2% y/y during December. The core rate was 0.7%.

Today's Morning Briefing: QE Futility. (1) The magic inflation target. (2) IMF lowers inflation outlook. (3) Despite ultra-easy money, central banks fighting deflation. (4) Rosengren is in no rush to raise rates. (5) What does QE really do? (6) From Draghi’s whatever-it-takes to QE. (7) Canadian surprise. (8) BOJ lowers inflation forecast and its credibility. (9) BOE is unanimous. (10) Earnings have some major headwinds. (More for subscribers.)