2015.30.01 News


Once again we begin with the Eurozone where the latest ECB policy announcement to launch large scale quantitative easing looks increasingly justified. Deflationary risks have risen dramatically as German CPI turns negative.

Moreover, the Eurostat Consumer Inflation Expectations Index has declined sharply, as the public begins to anticipate lower price increases.

While the ECB goes to work on deflationary risks, I continue to see some “green shoots” in the Eurozone. Don’t get me wrong – the overall economy is in bad shape. French labor markets have worsened significantly, Italy is in perpetual recession, over half of Spain’s youth are not working, Greece is about to restructure its debt – again, etc. Nevertheless here are some indicators I am watching:

1. Since the ECB’s tress tests in early 2014 (which had been a source of uncertainty for banks in 2013), loan balances in the Eurozone are beginning to stabilize. Corporate loans are still declining but at a much slower rate.

2. As a result of these improvements in bank lending, the growth in measures of broad money supply has picked up markedly.

3. I already discussed improvements in business and consumer sentiment, such as the ZEW indicator for Germany.

4. While retail sales across the Eurozone remain quite low relative to pre-recession levels, there are signs of improvements (albeit from very low levels).

Market sentiment on Russia continues to worsen with the ruble now trading at 68.85 to the dollar (the dollar bought 35 rubles last summer). Sovereign CDS spread (second chart below) is grinding higher as the nation struggles to keep its credit markets going. This situation is going to get worse before it gets better.

Anyone planning to introduce/increase consumption tax in their country? Don’t. Abe took Paul Krugman’s advice not to raise the tax the second time around. The first hike was enough to really damage Japan’s household spending.

Texas oil well permits have fallen over 50% since October according to the Dallas Fed. Permits are at the lowest level since 2012. Now we are going to see this adjustment spill over into other areas of the economy and into the Texas labor market.

The US dollar strength has certainly been impressive. However it has become a crowded trade and a sharp (albeit temporary) pullback is becoming likely. Speculative accounts – both large and small – are increasingly net long the dollar. This is definitely the right call fundamentally, but technicals look stretched.

On the commodities front, gold continues to outperform broad commodity indices. With so many central banks easing or beginning to ease policy, gold has found some support.


– Asian markets were buoyed by a late rally on Wall Street, which came after upbeat corporate earnings. Australia’s S&P/ASX 200 was the top performer, rising 0.9 per cent – investors are betting on a rate cut from the Reserve Bank of Australia when it meets next Tuesday.
– The Nikkei 225 rose 0.6 per cent in spite of new data showing that household consumption shrank more than expected and core inflation fell for a fifth straight month in December. (FT)
– Energy groups cut investment Royal Dutch Shell and ConocoPhillips plan to make billions of dollars of cuts in response to the plunge in crude prices, which has pushed Germany into deflation. (FT)


– Investors have woken up to Greece’s nuclear risk – Telegraph
– Yellen tells Senate Democrats U.S. economy looks good: media reports | Reuters
– U.S. Homeownership Rate Falls to 20-Year Low – Real Time Economics – WSJ



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s