2015.02.27 News


We start with the Eurozone where credit and economic conditions continue to improve.

1. The broad money supply growth has moved decisively higher – exceeding forecasts. This is a definite sign of the conclusion of the banking sector deleveraging. Clearly there is more to do on the recapitalization of some of the area’s banks, but the worst is over.

2. Growth in the Eurozone’s private sector loans also exceeded estimates and is about to turn positive.

Here is the breakdown between corporate and household loan growth.

3. Sentiment is gradually improving as well. Below is consumer confidence across the area as well as Spain’s business sentiment (both figures were released today).

4. Rates continue to fall. German, French, Portuguese, and other government bond yields hit record lows last morning.

5. The euro is near multi-year lows again, which should help the area’s exporters as well as soften deflationary pressures.

6. European stock markets are on fire as a result of these developments and the ECB stimulus. Below is the Dow Euro STOXX 50 (red) vs. the Dow Jones (blue) YTD (ignoring the currency component here).

Greece however remains the Eurozone’s potential Achilles heel. Greek depositors withdrew €12bn in January and probably continued to take cash out in February as well. This means that in order to replace this lost financing, Greek banks will need to tap more of central bank loans via the emergency liquidity assistance (ELA). That makes the Bank of Greece more indebted to the Eurosystem via Target2. Grexit is therefore becoming an increasingly expensive option for the EMU.

The US dollar resumed its rally in the last few days as expectations of a 2015 rate hike in the US increase.

As a result, vulnerable emerging markets currencies came under pressure again. BRL, TRY, IDR hit multi-year or record lows against the dollar. This is one of the dangers of the Fed’s potential early rate hike – it could significantly destabilize a number of nations.

Speaking of the USD rally, I am not sure Beijing can handle letting the yuan continue rising with the dollar for much longer because it makes China’s exporters less competitive. The yuan weakened again today and is now at the lowest level against USD since 2012. Is Beijing about to let the peg go?

Japan’s retail sales and household spending have never recovered from the consumption tax hike. It’s a good thing Abe’s administration did not hike the tax again last fall – that would have been a disaster.

Baltic Dry index is down 55% over the past year as demand for raw materials shipping, such as iron ore, declines.

In the United States the headline CPI (red) went negative for the first time since the Great Recession. However the core CPI rate (blue) remains resilient. Still, the Fed will have to wait for the headline figure to recover substantially before hiking rates.

With inflation collapsing, US real wages have moved higher – materially above consensus.

Investors poured $11 billion into HY funds/ETFs so far this year.

This has resulted in a spectacular rally in HY bonds as chase for yield resumes. Once again, an early Fed hike could “dampen” this enthusiasm.

– The US approved the biggest government intervention in the way the internet is run in almost two decades. The telecoms regulator adopted new “net neutrality” powers to ensure that broadband is treated as a public utility and all traffic is treated equally. (FT)
– A positive start for Asian equities Most Asian stocks were up this morning but emerging market indices slipped after US economic data added weight to the view that the Federal Reserve could raise rates by the summer. Tokyo’s Nikkei 225 added to the 15-year high it reached on Thursday in spite of weak economic data showing that the economy is flirting with deflation again. (FT)
– Isis released a video that appeared to show the destruction of rare and ancient artefacts from the Iraqi city of Mosul. This came after the Washington Post identified Jihadi John, the masked figure responsible for some of the most barbaric murders by Isis, asMohammed Emwazi, a Briton from west London. (FT, WaPo$)
– Plunging oil prices push idle rigs to 20-year high Oil drillers say the number of scrapped deepwater rigs will hit a two-decade high and the industry slump could last another two years. (FT)

Fast FT
– US inflation records annual drop on oil drag
– Loonie rises as core Canadian inflation holds up
– US annual inflation rate drops; Wall St shrugs
– Japanese consumption slumps, inflation slows
– Japan’s retail sales add to disappointment
– French consumer spending bounces strongly
– Danish economy basks in buoyant fourth quarter
– Spanish deflation eases as economy recovers
– Sweden serves up growth surprise
– Italian, German state inflation edges higher

– Bank of Japan’s Kuroda Still Seeking Blastoff
– Why the Dip Into Deflation Should Be Short-Lived


2015.02.26 News


Let’s begin with some recent trends in the US housing market.

1. New home sales came in stronger than consensus – up 5.3% from a year earlier.

2. But the buyers increasing seem to be wealthier individuals. US new homes are consistently getting larger as builders focus on “luxury homes”.

Another way to analyse this trend is by looking at the difference between new and existing home prices.

In fact, according to the WSJ for the first time “builders have sold more homes priced above $400K than those below $200K.” Once again, the lack of affordable housing – both for purchase and rent – will become an increasing problem in the US.

3. The 30-year mortgage rates have risen back to 4%.

As a result mortgage refinance activity slowed.

4. Longer dated lumber futures (Sep-2015 shown below) have turned decisively lower. Markets seem to be anticipating soft construction demand this summer. Note that some of this may be driven by the housing market in Canada, which is about to undergo a correction.

Now let’s take a look at a couple of updates in the energy markets.

1. The steep futures curve (contango), cold weather in some parts of the US, and refinery outages are pushing US crude in storage to new highs.

2. At the same time US crude production shows no signs of slowing. The fundamentals remain quite bearish for crude.

A number of analysts and investors continue to suggest that the US equity market looks increasingly overextended. Here are two indicators.

1. From the technical perspective we see bearish investors disappearing.

2. From the fundamental perspective here is the median price/cash flow ratio. One could justify these valuations as long as rates stay at current levels. But if the Fed decides to hike this summer – as a number of economists believe – things could quickly turn ugly for the stock market.

Switching to the Eurozone for a moment, here are some trends to watch.

1. Expectations for economic growth diverge sharply between Spain and the rest of the Eurozone, particularly Italy.

2. French consumer confidence is recovering quickly.

3. The ECB (as well as the National Central Banks) will find it increasingly difficult to find enough debt to buy, as net issuance turns negative.

4. That’s why yields on government paper remain at or near record lows. Here are the yields on the 5-year French bonds and the 10-year Irish bonds for example.

Economic reports out of Brazil continue to be abysmal. Here is the FGV consumer confidence indicator.

Finally, a note on Ukraine where the CDS-implied probability of default is approaching 100%. According to Bloomberg, “Ukraine risks losing IMF support for aid if war escalates”. And Moscow is more than happy to make sure there is no end to hostilities.


– Morgan Stanley will pay $2.6bn to settle claims that it mis-sold mortgage-backed securities in the run-up to the financial crisis. The US Department of Justice had charged half a dozen banks with mis-selling – this settlement brings the total of mortgage-relatedpenalties to about $40bn. Goldman Sachs is likely to be the last of the banks to settle its case. (FT)
– Chinese cyber security alarm European and US companies have asked their governments to help stop the implementation of new Chinese regulations, which will force local and foreign banks to use only IT equipment deemed “secure and controllable” by Beijing. The groups warned that the rules would “hurt the development and integration of the Chinese banking sector in the global market”. (FT)
– Lenovo hacked after adware blunder Less than a week after being criticised for pre-installing advertising software on consumer laptops that exposed users to hacking, Lenovo’s website was hacked. Customers reported seeing videos of young people looking into web cameras and employee emails were leaked. (Bloomberg)
– Budget reprieve for France and Italy The European Commission decided not to fine France for failing to bring its budget deficit under the EU limit of 3 per cent of GDP in time. Italy also got a pass for not cutting its debt level because more leeway is given to countries facing recession. (FT)
– Paying for the privilege of lending Germany sold five-year debt at a negative yield for the first time . Negative-yielding bonds mean investors pay more than the face value of a bond plus interest payments and accept a guaranteed loss if they hold it to maturity. These securities are becoming more common and reflect a demand for haven investments. In Germany’s case, the ECB’s quantitative easing programme was seen as the main catalyst. (FT)

Fast FT

– US mortgage applications fizzle for third week
– US home sales fare better than expected
– France, Italy spared fine over budget breach
– Venezuela’s bolívar tumbles beyond 200 mark
– Aussie business spending numbers underscore gloom
After adjusting for the typical bias in firms’ investment intentions, the survey suggests that non-mining investment is likely to contract by around 7% over 2015-16 in year-average terms. This result suggests that firms remain very gloomy about the outlook and are unwilling to commit to lifting investment spending.”
– BoJ’s Ishida favours stable yen “the government appears to be less welcoming of further yen depreciation at this moment and is accordingly toning down its rhetoric on the need for additional QE.”
– Spanish Q4 GDP growth confirmed at 0.7%
– German unemployment falls by 20,000 in February “A strong start to the year for Germany’s jobs market.”
– UK GDP growth confirmed at 0.5% for Q4
– Eurozone economic confidence rises


2015.02.25 News


Let’s begin with the United States where house price appreciation (per Case Shiller index) seems to have leveled off above 4% per year. Both the National Association of Realtors (NAR) and Case Shiller seem to indicate a more even price growth across the various regions than in the past.

US house price appreciation continues to trend significantly above wage growth – which has been around 2%. This tells me that homes are becoming increasingly unaffordable for a large portion of the population. With rents also rising faster than wages and new construction remaining subdued, lack of affordable housing may become a serious issue for the US in years to come.

The media has been buzzing about the growth of treasury and agency MBS holdings (“safe bonds”) at banks. Indeed the absolute levels have risen above $2 trillion

What do these banks know that we don’t Why are they hoarding safe bonds?

This is absolute hype. Yes, banks are holding more treasuries and agencies in order to comply with regulatory liquidity ratios. These bonds are also exempt from the Volcker rule unlike corporate debt. But whatever the case, “safe bond” holdings as a percentage of total bank assets are not that extraordinary. But the headlines sure get the website clicks, etc.

According to the latest report from Markit, the US service sector has regained momentum in February. Markit’s economists are quite positive about an early Fed hike.

Now a few developments in emerging markets:

1. Turkey cut its benchmark interest rate today. It’s a dangerous move with lira trading near record lows. This could get really ugly if the Fed were to hike rates later this year and we get a repeat of “taper tantrum”.

2. Nomura points out that foreign currency denominated debt across emerging markets is actually much higher than typically reported because of offshore bond issuance. This will also quickly become problematic should the Fed decide to move on rates and the US dollar appreciates further.

3. A number of emerging market nations are entering deflation as falling prices spread from the wholesale level to the consumer. I discussed Singapore yesterday – here is more.

4. Venezuela continues to unravel as violent protests spread.

5.The Ukrainian currency (hryvnia) shed another 16% today. What a disaster.

Here is the timing expectation for the next rate hike for the US, the UK, and the Eurozone (as expectations evolved over time). As I said before the timing for the US looks a bit aggressive, but the policy divergence is impressive: Sep-2015 for the US, Feb-2016 for the UK, 2019 for the Eurozone (from Charlie Bilello).

Easy monetary policy works well in boosting stock markets. YTD top 10 best DM performers are all in nations where central banks have eased. What does it mean for US equities when the Fed decides to initiate liftoff?

Now a couple of notes on the energy markets.

1. There is an argument to be made that a good portion of the collapse in crude can be explained by stronger dollar. The dollar explains half the variance in crude oil price movements. Quite surprising actually.

2. Wind power capacity and generation has been rising significantly in Texas. Two questions:
A. How much of this is driven by tax credits?
B. What will happen to this trend given persistently low natural gas prices?

For those who love stock picking, consider the following chart showing the percentage of shares beating the market. When you make you selection, you better be right or your portfolio will underperform. This certainly argues for index investing.


– US Fed chairwoman Janet Yellen laid the groundwork for the end of zero interest rates yesterday. She said the labour market had improved and the central bank will start tightening monetary policy when it is “reasonably confident” that inflation will move back to its 2 per cent objective. US stocks rose to record highs after her comments, while Treasury bonds and the dollar saw some choppy trading. The momentum did not carry over into the Asia-Pacific region, where bourses weremuted this morning. (FT)
– Greek reforms approved Eurozone finance ministers approved Greece’s proposed economic reforms. Parliaments now have to approve the bailout extension before it expires on Saturday. Kerin Hope examines the key pledges to see where Greek finance minister Yanis Varoufakis has room for manoeuvre. (FT)
– Eurozone banks need better capital Daniele Nouy, the ECB’s chief banking supervisor, said some of the bloc’s biggest banks will need to raise more and better-quality capital because of the clampdown on national exceptions to capital rules. She said fresh legislation from Brussels was likely to be necessary. (FT)

Fast FT

– Turkish central bank cuts interest rate again
– US housing rebound “faltering,” Case-Shiller warns
– Eurozone approves Greek reform proposals
– IMF, ECB voice concern at Greek reform proposals
– Yellen seeks wiggle room on patience pledge
– BoC’s Poloz hits Loonie before blackout
– HSBC China manufacturing PMI beats expectations
– Janet Yellen’s testimony: key extracts

On the labour market

Long-term unemployment has declined substantially, fewer workers are reporting that they can find only part-time work when they would prefer full-time employment, and the pace of quits–often regarded as a barometer of worker confidence in labor market opportunities–has recovered nearly to its pre-recession level.

However, the labor force participation rate is lower than most estimates of its trend, and wage growth remains sluggish, suggesting that some cyclical weakness persists. In short, considerable progress has been achieved in the recovery of the labor market, though room for further improvement remains.

On the drop in oil prices

The bulk of this decline appears to reflect increased global supply rather than weaker global demand. While the drop in oil prices will have negative effects on energy producers and will probably result in job losses in this sector, causing hardship for affected workers and their families, it will likely be a significant overall plus, on net, for our economy.

Primarily, that boost will arise from U.S. households having the wherewithal to increase their spending on other goods and services as they spend less on gasoline.

On the global economic backdrop

Foreign economic developments, however, could pose risks to the outlook for U.S. economic growth. Although the pace of growth abroad appears to have stepped up slightly in the second half of last year, foreign economies are confronting a number of challenges that could restrain economic activity.

On inflation

The Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate, but we will continue to monitor inflation developments closely.

On when raising interest rates

The FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.

If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.

Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.


– Germany’s Budget Surplus Strengthens Hand in Dealing With Vulnerable Eurozone Economies
– The Bank of England Dove Hunt Is On
– The IMF Slammed Greece’s Proposed Overhaul to Its Bailout. Here’s Why It Matters


2015.02.24 News


Brazilian real continues to deteriorate

Brazil business confidence

Singapore inflation rate

Existing home sales (US)

Mexican peso under pressure again

Dallas Fed survey of Texas manufacturing. Is the hit to the energy sector taking its toll?

Ireland 10-yr government bond yield near all-time lows

The yuan remains at the weaker end of the trading band

Canadian short-term government yields collapse on BoC rate cut expectations

Canadian government yield curve inverted in the front end on lower rate expectations

Someone made good money spreading the “emergency OPEC meeting” rumor

PBoC is having a tough time keeping rates stable, as interbank rates spike again ==> tight monetary policy


– BHP Billiton, the world’s largest miner by market capitalisation, reported that its interim profits had fallen by almost half as prices for its most important commodities, which include oil and iron ore, slumped. (FT)
– Greek reform plans Eurozone finance ministers are expected toweigh up Greece’s proposed reform plans today – the last hold-up to deciding whether to extend Greece’s EU programme beyond Saturday. If the list proves unacceptable, the ministers will be summoned to Brussels to resolve differences in person. (FT)
– UK: no country for young men Young adults’ living standards have been on the slide, pushed down faster by the recession, while pensioners have enjoyed a rapid rise up the income table. (FT)

Fast FT
– Bank of Israel cuts interest rates
– US home sales fall to nine-month low
– Dallas manufacturing disappoints – report
– Eurozone FM’s to hold call on Greek reform plans
– New Zealand’s inflation expectations lowest since 1999
– Japanese SME confidence remains in doldrums
– Eurozone inflation confirmed at minus 0.6%
– Oil whiplashed on Opec emergency meeting hope
– Fast Asia Open: Markets await Yellen
– Greek stocks jump 7 per cent on bailout hopes
– Greek reforms “sufficiently comprehensive” – EC


– Made-in-Japan Electronics Regain Competitiveness, Index Shows

– Australia’s Frothy House Prices Make Another Cut Unlikely–At Least for Now
– Why Do Budget Forecasters Keep Getting It So Wrong?


2015.02.20 News


Let’s begin with the FOMC minutes released yesterday. As I discussed before, the Federal Reserve, particularly with Stanley Fischer’s influence, is increasingly focused on the global macro situation.

FOMC: – … the increase in the foreign exchange value of the dollar was expected to be a persistent source of restraint on U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further. In addition, the slowdown of growth in China was noted as a factor restraining economic expansion in a number of countries, and several continuing risks to the international economic outlook were cited, including global disinflationary pressure, tensions in the Middle East and Ukraine, and financial uncertainty in Greece.

With concerns about the dollar strength, increased global economic uncertainty, and collapsing inflation, one would think a rate hike this year is unlikely. Yet the futures market points to liftoff around the end of Q3 or the beginning of Q4 of this year.

The only way a hike will be possible later this year is if we see a substantial pickup in wage growth in the US. As I discussed yesterday, we haven’t seen compelling evidence of that so far.

Continuing with the US economy, the first quarter definitely feels softer than economists have been forecasting. GDP growth of around 2 – 2.5% is probably where we will end up – perfectly fine in the current macro environment. The prolonged West Coast port workers’ “strike” is not helping.

The National Association of Realtors points out that US homes are rapidly aging. And that will increasingly require spending for renovations prior to selling.

That’s why we see shares of Home Depot (blue) outperform the S&P500 (red) by almost 30% over the past year.

The current oversupply of oil in the US is staggering. Crude oil in storage is now at the highest level in more than 80 years. It’s just a matter of time before Cushing, OK runs out of storage capacity or storage prices make the contango arb unprofitable.

Speaking of energy, stronger US dollar has helped a number of exporters by softening the declines in crude oil priced in domestic currencies.

In the Eurozone the consumer seems to be unfazed by the situation in Greece thus far. Consumer confidence has risen sharply. This is a positive development because the Eurozone will need all the help it can get if Greece defaults/exits.

The Russian central bank reserves continue to decline. While there is plenty here to support the ruble if need be, the appetite to spend more to defend the currency is no longer there.

Brazil continues to let its currency fall (chart below shows USD appreciating against BRL). Brazil’s inflation is already elevated and could rise further if currency weakness persists. But Brazil is in a currency war with Australia, Indonesia, etc. and there is little appetite to stem the devaluation.

Here is an interesting fact. Some 90% of the world’s developed economies (weighted by GDP) now operate near or below zero policy interest rates.

It’s interesting to see how Japan’s growth slowed down as the working-age population in that nation declined. Once again this points to the need for a more supportive immigration policy for nations that face aging populations – including the US.

In fact, Greece is having this problem, as the deep recession has been exacerbated by shrinking working age population.


– Athens’ chances of finding itself without an EU financial backstop in one week will come down to a bitter face-off in Brussels today between the Greek and German finance ministers, after Berlin rejected Greece’s request to extend its €172bn rescue by six months. The German rebuff came just hours after Yanis Varoufakis, the Greek finance minister, reversed his government’s long-held promise to kill the current bailout in a letter to his fellow ministers. But the letter, obtained by the Financial Times, had clauses that Berlin told counterparts amounted to “a Trojan horse” designed by Athens to change the conditions it must meet to receive €7.2bn in aid available for finishing the bailout. (FT)
– Pentagon warns on Isis attack The Pentagon has taken the unusual step of disclosing plans for an Iraqi-led attempt to retake Mosul , Iraq’s second-largest city, from Islamist militants in a spring offensive. About 20,000 Iraqi and Kurdish soldiers are being prepared for the battle. The Pentagon said there was no decision yet on any US participation. (FT)
– Ukraine freeze on gas A new faultline has opened up between Ukraine and Russia over natural gas, after pro-Russian rebels in east Ukraine accused Kiev of cutting off supplies amid sub-zero temperatures. Russia said it had started supplying gas, while Kiev said the problem was pipelines being damaged by heavy fighting. (FT)
– French no-confidence vote France’s socialist government has survived a no-confidence vote in parliament. It fell well short of the 289 votes needed and means the survival of an economic reform package that President Francois Hollande argues is vital for restoring growth. (FT)
– Greenspan on oil shift The fall in the oil price has led to a marked change in the economic and geopolitical landscape, with the US and its allies the main beneficiaries, argues Alan Greenspan, former chairman of the US Federal Reserve. Opec is having to deal with shale oil output that can expand and contract with demand more rapidly than conventional wells. (FT)

Fast FT

– UK mortgage lending declines, trade body says
– Eurozone finance ministers to discuss Greek aid
– White House identifies risks to US recovery
The accelerating US recovery risks being slowed by weak income growth, inequality and depressed rates of labour force participation, according to the White House.
– UK factory orders surge in February, CBI says
– ECB’s first minutes: “large majority” backed QE
– Germany rejects Greek bailout extension request
– Japanese manufacturing slows, exports still grow
– Eurozone manufacturing still near stagnation levels
– Investor flows into junk debt funds near $10bn

– Investors pour $5.8bn into European equities

– The U.S. Economy According to the White House in 10 Charts

– Bundesbank President Adds to Criticism of Greeks’ Request
– Who’s Most Likely to Default on Student Loans?

– In Fed Survey Ahead of January FOMC, Big Banks Expected Summer Rate Rise
– Bank of Japan Should Relax Inflation Target, Says Ex-Official


“And in fact, it looks like that might be happening. In a new analysis out today, EPI finds that while wages have continued to sink for people at most income levels through the economic recovery, since 2012, they have actually risen for the bottom 10 percent



Let’s start with Japan where weaker yen is helping the nation with its trade deficit. While lower oil prices reduced the value of imports, it was also the weak domestic demand and higher import prices that pushed imports lower. Exports on the other hand were clearly helped by weaker yen. Trade deficit declined as a result.

Japan’s equity markets love this dynamic of improving export growth and the potential for further yen weakening. The Nikkei 225 hit the highs not seen in decades.

Currency devaluation is becoming the new model for a number of economies, including the Eurozone.

Will China be next?

Speaking of Japan, the net government bond issuance, when accounting for central bank buying, is now negative for major developed economies combined. The supply of “safe” paper used for collateral in the repo markets and elsewhere is declining. Amazing.

Now on to Ukraine where the economic situation is deteriorating by the day. The currency (hryvnia) is falling further – approaching 31 hryvnia per one euro.

Dollar denominated Ukrainian sovereign bonds fell to new lows as the market prepares for a deep restructuring.

The Russian ruble on the other hand rallied sharply as the Russian Finance Ministry announced that it is going to convert $8bn of reserves into rubles.

Deflationary risks are spreading throughout Europe as the French CPI approaches zero. It will be interesting to see how much of this will be transmitted to the core inflation measures.

These days I simply can’t send out the Daily Shot without mentioning Greece at least once. Below is the nation’s austerity program in perspective.

And here is a graphical story of the destruction of the Greek banking system, as bank shares collapse in about 7 years.

Switzerland’s economic expectations collapsed on stronger currency. The recent spike in the Swiss franc is about to take its toll on the nation’s economy.

The UK economy continues to improve as the unemployment rate falls further. This is quite impressive. However, low inflation (discussed yesterday), weak wage growth, and slowing property markets will keep the Bank of England on hold for a while.

Now we turn to the United States where the producer price index (YoY) hit zero. It remains to be seen how much this will feed through to the CPI.

Speaking of labor markets, the US unemployment rate is approaching the so-called long-term “natural” rate of unemployment. This is something the Fed watches closely as it suggests a potential for wage increases (at least in theory).

But so far we haven’t seen substantial wage increases. While some point to rising weekly earning growth for US workers, in reality Americans are just working longer hours.

In the energy markets we have seen the largest weekly spike in US crude oil in storage. This actually may be a record increase, though I don’t have the data prior to 2012.


– Jeb Bush, the frontrunner for the Republican nomination in the next US presidential election, has attacked Barack Obama and talked about a world spinning out of control, in his first major foreign policy speech. The former Florida governor said President Obama had not done enough to stand up to Iran, Russia and Cuba, while accusing him of snubbing Israel.“Everywhere you look, you see the world slipping out of control,” Mr Bush told the Chicago Council on Global Affairs. “Under this administration, we are inconsistent and indecisive. We have lost the trust and confidence of our friends. We definitely no longer inspire fear in our enemies.” (FT)
– Fed still cautious on rates Many Federal Reserve members were inclined in January to keep interest rates low for longer. The minutes of their latest meeting underline the US central bank’s cautious stance towards normalising monetary policy. (FT)
– ECB supports Greek banks A Eur3.3bn increase in emergency loans was approved by the European Central Bank on Wednesday evening to support the Greek banking system. With the political and budget crisis, deposits across the country’s four systemic banks are down Eur20bn since December to Eur145bn , according to people familiar with the outflows. (FT)

Fast FT

– The Bank of England’s policymakers once again voted unanimously to hold interest rates unchanged at the meeting held earlier this month, after falling inflation declawed two previously hawkish officials.
– Swiss investor confidence knocked by peg removal
– US homebuilding has sluggish start to 2015

– Lew urges Varoufakis to find Greek debt deal
– Ukrainian industrial production shrivels in Jan
– Fed minutes: officials hit cautious note on rates
– Mexico cuts GDP outlook as low oil prices bite
– ECB increases emergency lending to Greek banks
– Japan records 31st straight trade deficit
– Emerging-market currencies sent higher by Fed
– Dovish Fed minutes bolster gold
– Oil slump accelerates as crude stockpiles build

– Key Passages in the Fed’s January Meeting Minutes
Federal Reserve officials remain optimistic about the U.S. economic outlook
Many Officials Worried About Raising Rates Too Soon
Strong Dollar Seen as ‘Persistent’ Restraint on Exports
Keen Focus on Overseas Risks
Core Inflation a Worry, But Still Confident in 2% Target
– IMF Shinohara Says More BOJ Easing May Be Needed


2015.02.18 News


Once again we start with Greece where apparently the new government is ready to play ball – at least in the nearterm. Greece will be asking for a bridge loan as prescribed by the Eurogroup.

Why all of a sudden? It was the Austrian Finance Minister Hans-Joerg Schelling who, on behalf of the Eurogroup, drove the following point home.

It’s easy to see how taking this hardline makes political sense for many in the Eurozone. Some of this pushback on Greece is not originating from Germany. Instead it’s nations such as Slovenia who have been quite angry with Greece.

The Slovenia Times: – “Given such an exposure Slovenia has toward Greece and such solidarity we provided, Greece has said it plans to raise pensions, raise pay, make employments in the public sector and demand an extra cut in its liabilities to Slovenia, while in Slovenia we are slashing pay and economising in all areas,” [Slovenia’s Finance Minister Dušan] Mramor said.

Elsewhere in the Eurozone, the area’s economic sentiment indicator (ZEW) came in above expectations.

It’s interesting to see that the euro, helped by economic tailwinds, remains fairly resilient in the face of the Greece standoff.

In the UK producer prices are falling sharply. The massive declines in the wholesale input prices are feeding through to the output prices.

And this decrease in the PPI is flowing through to the consumer prices, as the nation’s CPI hit the lowest level on record.

The sad story of Ukraine’s collapsing economy continues to unfold. The GDP fell 15% on a year-over-year basis.

Now on to China where pressure is building on the yuan. Given the ongoing growth slowdown, the PBoC desperately wants to ease policy but is afraid that the credit bubble in the corporate sector (some of which was helped by the explosion of “wealth management products”) will worsen as a result of lower policy rates. Allowing the yuan to weaken may be a better option to help stimulate growth. After all, everyone else is doing it.

The yuan now trades at the weaker end of the permissible range.

One of the reasons for the downward pressure on the yuan is the short-term profile of China’s cross-border debt. We are seeing some capital outflows.

Investors remain uneasy with massive amounts of dollar denominated debt outside of the United States. As a number of currencies depreciate against the dollar (such as the Indonesia example above), these dollar liabilities will become increasingly more difficult to repay. Combine that with weak commodity prices (with many of these loans used to fund raw materials and energy projects) and we’ve got a series of defaults on the way.

The chart below is a bit dated but bloggers love to show it and discuss the sad state of the US economy. This is what I call “extrapolating the bubble”. Using the 2005-2007 range to project potential GDP is absolute nonsense. That growth trajectory was only possible with massive amounts of credit and those days are over. Get used to it – this is the new normal.


– Eurozone countries have given Athens a final deadline of Wednesday to extend its EUR172bn rescue programme, after talks in Brussels broke down in acrimonylast night. The Greek finance minister said he was confident an agreement could be reached based on earlier proposals for a four-month extension. Without a backstop, officials fear renewed market turmoil and a bank run in Greece. (FT)The irony is that the reforms in Greece – like those imposed on Portugal and Ireland, which have stood firm with their creditors – were beginning to bear fruit. Syriza may have “knocked over the apple cart when it was just about to reap the reward of its people’s sacrifices”.
– Ukraine ceasefire already crumbling Just 48 hours after the ceasefire took effect, the battle for Debaltseve intensified and Kiev refused to surrender a strategic railway hub where thousands of government troops were surrounded and faced attack by Russia-backed separatists. (FT)
– US spyware spotted Kaspersky Labs, the Moscow based cyber security company, said it had uncovered sophisticated hacking tools in personal computers in 30 countries including Iran, Pakistan, Russia and China. It suggested they were devised by the US. (FT)
– Transocean’s dividend slash One of the world’s largest offshore drilling contractors is cutting its dividend 80 per cent – another sign of oil prices battering the industry. The company said the reduced payout would help it retain an investment grade credit rating. (FT)


– Fed’s Plosser joins criticism of “audit” calls
– Bank of Japan maintains policy; no surprises
– UK unemployment falls, wages grow healthily
– S&P 500 hits new record high
– Nikkei 225 rises to new 7 1/2 year high
– Aussie stocks on path for 6 1/2 year high
– Aussie, Japanese, Indonesian shares all jump
– Greek bonds trade calmly amid debt talk hopes
– European stockmarkets rise on Greek bailout hopes
– Sterling strengthens on strong UK employment data