Posts filed under “Think Tank”
The 2 major data points during the week were
December CPI data for the EuroZone (EZ); and
US December non-farm payrolls.
EZ December CPI came in at -0.2% Y/Y, weaker than the decline of -0.1% Y/Y and below Novembers +0.3%. However, core inflation rose to +0.75%, up from +0.67% in November.
The data is yet another indicator which suggests that the ECB will announce a sovereign bond QE programme at its next meeting on the 22nd January. The size is expected to be E500bn and, most likely, will involve central banks of the countries in the EZ buying their own bonds up to their relative shareholding (which roughly equates to their respective GDP’s) in the ECB. Each central bank will be liable for their own credit risk, thereby avoiding German fears that the bond buying programme will pose a joint and several risk on all EZ countries.
Whilst the announcement is a near certainty, I have to say it is unlikely to work. The size, in any event, is too small and will, almost certainly, will need to be increased in due course. However, the QE programme will result in further weakness of the Euro. However, net Euro shorts are up from 152k to 161k contracts as at the 6th January, getting closer to the record net short position of 179k contracts last October, which could limit the Euro’s decline in the shorter term. Short positions on Sterling, C$, A$ against the US$ rose, though JPY shorts declined to 90k contracts, as opposed to 96k previously.
3 days later on the 25th January, the results of the Greek national elections will be announced. As it’s Greece, expect some twists and turns, but the market is remarkably complacent. Greece will not be kicked out of the Euro in the immediate future. The uncertainty will however weigh on the Euro further.
The US December non-farm payrolls data reported that 252k jobs were created in December, with job gains spread across most sectors. The unemployment rate declined to 5.6%, mainly due to a fall in the participation rate. A good number and the highest increase in employment since 1999. However, the fly in the ointment was the -0.2% decline in wages and November’s downward revision. Clearly disappointing and hard to explain, though the ECI data (which the FED looks at and, I suspect, is more reliable) suggests that wage growth continued to increase in Q3/Q4. Wage growth in the energy and related sectors are bound to have been negatively impacted by the oil price decline, but I continue to believe that wage growth will accelerate this year as the employment market tightens.
The market is panicking over deflation. Whilst inflation levels are and will remain low, the prospect of a Japanese style deflation is not on the cards. Indeed, lower inflation, due to a decline in commodity prices (energy, in particular) is a massive positive factor for consumer driven economies such as the US and UK. I remain convinced that oil prices (Brent) will decline to below US$50 (US$45?), though unlike markets, I see this as a huge positive. I remain bullish US and other developed equity markets, together with consumer driven emerging markets such as India. Having said that, there is a risk of higher inflation and a wider budget deficit in India, I must admit. Government reforms have been slower than expected – no great surprise – the new administration promised far too much and certainly will be unable to deliver this year.
S&P is likely to downgrade Russian debt to junk by the end of the month, with the Rouble weakening further. The continued decline of oil prices will not help either. A Rouble/Russian crisis looks as if its just a few months away.
My thoughts and prayers go out to those murdered in France by fundamentalists. The fear (very likely) is that countries will impose stricter laws as a result, which will limit personal freedom.
I am currently back in India and will be providing an update on the political, financial and economic situation.
Is it only about getting paid? Don’t tell me it’s about breaking music, that canard disappeared in the last decade. It’s almost impossible to get noticed. Kanye does a track with Paul McCartney and it’s dead in a day, despite being featured in every newspaper and on every music website extant. Getting the message out…Read More
Why Is Wage Growth So Slow? Mary C. Daly and Bart Hobijn FRBSF, January 5, 2015 Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of…Read More
Draghi? Draghi. Draghi! David R. Kotok January 3, 2015 A German newspaper reports Mario Draghi’s denial of interest in Italian politics as a major story, which then makes its way to the financial news in the US. Really? First, it is appropriate for the president of the European Central Bank to say that…Read More
Predictions 1. The major labels will only get stronger. We live in an a money economy and the only ones willing to invest in artists are the labels. Furthermore, they’ve got the relationships at radio, which are key to developing acts. The players want cash, the major labels have it, no one else will get…Read More