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


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