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