2015.01.28 News


I’d like to start with the Eurozone, where a showdown between the euro area institutions and Greece will be taking place in the next few months. Greece’s newly appointed finance minister Yanis Varoufakis, a staunch bailout critic, will lead the negotiations for debt haircuts. On the other side will be the International Monetary Fund and European Commission – with additional support from the ECB. A number of Eurozone politicians have already expressed skepticism about any debt forgiveness for Greece. But Varoufakis is likely to focus on the argument that Germany has to take a great deal of the blame for the situation in which Greece now finds itself. Here is a good quote from Strafor:
Stratfor (via Forbes): Another version, hardly heard in the early days [of the Eurozone crisis] but far more credible today, is that the crisis is the result of Germany’s irresponsibility. Germany, the fourth-largest economy in the world, exports the equivalent of about 50 percent of its gross domestic product because German consumers cannot support its oversized industrial output. The result is that Germany survives on an export surge. For Germany, the European Union — with its free-trade zone, the euro and regulations in Brussels — is a means for maintaining exports. The loans German banks made to countries such as Greece after 2009 were designed to maintain demand for its exports. The Germans knew the debts could not be repaid, but they wanted to kick the can down the road and avoid dealing with the fact that their export addiction could not be maintained.
The argument will also focus on the fact that Greece has done an amazing job in cutting its debt/GDP ratio – in spite of falling GDP.

Greek yields remain elevated, though below the recent highs. As negotiations progress, we are going to see a great deal of volatility in these bonds as well as across other euro area assets.

Now on to Russia where FX reserves show a significant deterioration. That’s the price of defending the ruble.

There has been talk among a number of nations about taking Russia off the SWIFT payment system – as part of the sanctions. That would be utterly devastating because it would cripple the nation’s ability to make or receive international payments – including debt payments. Medvedev threatened that “… if such decisions are made, I want to note that our economic reaction and generally any other reaction will be unrestricted” (source: RT). Indeed such action could result in a desperate and unpredictable response from Russia.

UK mortgage approvals continue to decline as the housing market cools. Strong housing market was the key reason the Bank of England was considering an earlier rate hike last summer (some expected them to pull the trigger in December). Now BoE liftoff is off the table for at least a year.

China’s firms’ industrial profits declined materially in recent months (chart below).

As I discussed last year, one of the key risks across a number of markets in 2015 will be the rise of the US dollar. Here is how the major trade-weighted exchange rate indices have moved in the past six months.

We are starting to see the consequences of this dollar strength in US large cap markets. Here is the headline for Procter & Gamble. The US markets sold off in reaction to this (as well as a the poor durable goods orders print).

A surprising pickup in the US housing market. Some are saying these indicators are misleading, but I am staring to see a pattern of improvements. Here is the new home sales report – materially above consensus.

The Fed’s liftoff expectations continue to get pushed out, as Morgan Stanley now sees the first rate hike by March 2016. This is more dovish than the futures markets. The reason of course is the massive decline in forward inflation expectations. Strong US dollar (with a potential for further rally) is another – which would of course exacerbate disinflationary pressures and, as we saw earlier, hurt corporate profits.

Overall, the IMF as well as numerous other economists remain quite constructive on the US economy.


– Apple sold 74.5m iPhones to report the largest profit in history in the three months to December. Its net profit grew 37 per cent to $18bn and beat ExxonMobil’s previous quarterly record of $15.9bn in 2012. (FT)
– Singapore loosened monetary policy It is the latest Asian country to do so as economic growth slips and oil prices pull down inflation. The central bank slowed the pace at which the Singapore dollar appreciates against other major currencies – a tool it uses rather than interest rates – and sent the Singapore dollar down the most in a single day since 2010, to S$1.35 against the greenback. (FT)
– The threat of sanctions on Russia European leaders threatened to impose more restrictions, saying there was evidence of Russia’s “continued and growing support” for separatists in eastern Ukraine, where fighting has escalated in recent days. The EU is struggling to maintain a united front on this issue, however, as Greece’s new government has distanced itself from this call for broader sanctions. (FT)
– UK growth speeds up The economy grew 2.6 per cent in 2014 – the fastest rate since the financial crisis. This has stoked confidence within the Conservative government even though the data wereweaker than expected and it took the British economy longer than its international rivals to exceed its pre-recession peak. (FT)
– The Federal Reserve The US central bank is expected to make a steady-as-it-goes statement after its monetary policy meeting but it will be under intense scrutiny as it prepares the way for a possible rate increase. Analysts will be watching to see whether the Fed notes the weakness in wage growth and will be looking for worries about low inflation expectations. (FT)


– BBC News – Scotch whisky ‘worth £5bn to UK economy’
– PRESENTATION: Here’s How Germany Ate Everyone’s Lunch After The Euro Was Created – Business Insider


– Australia’s Accelerating Core Inflation Cools Rate Cut Bets
The trimmed mean gauge of core prices rose 0.7 percent from the previous quarter, when it climbed a revised 0.3 percent, the Bureau of Statistics said in Sydney today. That was more than the median forecast of 23 economists for a 0.5 percent gain. Australia inflation is holding at the low end of the Reserve Bank’s target. “This tells you that demand in the economy is holding up reasonably well compared to supply and I think that’s the way the RBA’s going to see this story as well,” Paul Bloxham, chief Australia economist at HSBC Holdings Plc, said by phone in Sydney. “We continue to expect that the RBA will remain on hold this year, we don’t think they’ll deliver cuts.” It may be reluctant to lower borrowing costs further amid surging property values. Sydney home prices climbed 12.4 percent in December from a year earlier, a Corelogic-RP Data home value index showed.
– Watch What Wheeler Doesn’t Say as N.Z. Rate-Rise Odds Dwindle
In New Zealand, where policy makers are wary of reigniting home-price surges and expect growth of more than 3 percent this year, the response to disinflation could mean pushing any rate increase beyond 2015. “Although inflation is expected to drop to a very low level, this is a temporary phenomenon due to falling global oil prices,” said Westpac’s Stephens. “Cutting the cash rate at this juncture would be a mistake.”
– Singapore Dollar Is Weakest Since 2010
Singapore unexpectedly eased monetary policy, sending the currency to the weakest since 2010 against the U.S. dollar as the country joined global central banks in shoring up growth amid dwindling inflation. The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool, said in an unscheduled statement Wednesday it will seek a slower pace of appreciation against a basket of currencies. It cut the inflation forecast for 2015, predicting prices may fall as much as 0.5 percent.
– Russia to Spare Defense Spending as Most 2015 Outlays Cut by 10% (“Defense” as in Offense.)
Russia will raise budget spending on social support and agriculture and exempt this year’s defense outlays from reductions as part of a 2.3 trillion ($35 billion) stimulus program that will see most other expenditures cut by 10 percent in 2015.
– Nobel Winner Shiller Says It’s Time to Buy Greek Stocks
– Tsipras Aims to Avert Catastrophe But Greek Markets Sink Further



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