The four forces now shaping the global investment climate
There are four main forces shaping the immediate investment climate and these remain essential unchanged: 1) Fed tapering not expected until late Q1 14. 2) ECB will likely take additional action to ease financial conditions and disinflationary forces in the euro area. 3) Disappointment over Abenomics third arrow and widespread skepticism of the likelihood that the BOJ’s core inflation target will be met without additional action. 4) The Chinese economy has stabilized, but the world’s second largest economy is entering a new phase, while the new government has recently highlighted its reformist credentials.
That these main forces have not changed leaves the US dollar trading within well-worn ranges. There two main price features today are the strength of sterling and the weakness of the Antipodean currencies. It is difficult to link sterling’s gains to the MPC minutes, which appear to have largely been preempted by the Quarterly Inflation Report. The BOE is more upbeat on the economy that it was a few months ago. It largely shrugged off the rise in inflation expectations and notes that such expectations have not filtered into wage increases, which it, arguably, mistakenly sees as a good thing.
Declines in real income is not consistent with a sustained economic recovery.
It appears the bid for sterling is partly a function of demand against the euro, which is staging a potential reversal after moving higher the last couple of days. A break of GBP0.8360 is needed to open up the downside. Against the dollar, the double top from October was set near $1.6260 and appears to be the target.
The heaviness of the Antipodean currencies appears to be a simply case of profit-taking after the recent run-up. The fundamental news was positive, with a leading economic index for Australia ticking up and a rise in New Zealand’s producer prices (Q3 input 2.2% from 0.6% and output 2.4% from 1.0%). The latter will reinforce ideas that the RBNZ can raise rates in the first part of next year.
Ironically, yesterday, the Australian dollar traded on both sides of Monday’s range with a strong close (above Monday’s high), but there is no follow through and the Aussie looks to have once again been turned back from testing its 20-day moving average (now ~$0.9450), though it may require a break of $0.9350 to raise confidence that a near-term top is in place. For its part the Kiwi is in an $0.8300-$0.8400 near-term trading range.
Japan reported a much larger than expected trade deficit. The Oct shortfall stands at JPY1.09 trillion about 20% larger than the consensus forecast. It is the largest since January, though on a seasonally adjusted basis, it fell by slightly from Sept, but is still the second largest of the year. The problem is not exports. They are up 18.6% from a year ago after rising 11.5% on a year-over-year basis in Sept. Imports are the culprit. They are up a little more than 26% from a year ago (16.5% in Sept).
The impact of the weak yen is more complicated than seems to be generally appreciated inside and outside of Japan. Moreover, as we have previously noted, Japanese exports as a percentage of GDP are roughly the same as the US, which is less than half of Germany, Switzerland and China, for example. On the other hand, the weak yen does boost Japan’s investment income surplus (the value of foreign earnings, such as interest payments, dividends and royalties and licensing fees) and helps offset the trade deficit in the calculation of the current account.
Japan’s government pension fund (GPIF) essentially reiterated the preliminary report that indicated a need to boost the foreign asset ratio of its portfolios. More precisely what this means and when it will be implemented remains unclear and did not appear to be much of a factor.
Last week, we offered a reading of the options market that cautioned against playing for an upside break in the dollar-yen rate and instead favored continued range bound action. Today the dollar is recording its third lower high after peaking at the end of last week in front of the Sept high set net JPY100.60. Support is seen now near JPY99.80. The pressure appears to be coming from the crosses, where the euro, for example, is turning lower from a new four-year high. The yen is also bid against the dollar-bloc.
Bernanke’s comments late yesterday did not break new ground. If there is a take away, it would reinforce ideas that QE will be replaced by more emphasis on forward guidance. This is perfectly consistent with what Yellen (and Dudley) said. This helps draw the distinction between tapering and tightening. Bernanke did note that the markets previously were struggling to make this distinction and that that played a role in the decision not to taper.
The FOMC minutes from last month’s meeting will be released today. These are unlikely to move the markets, but may be interesting to see the discussion on fiscal policy, especially as we head toward the new self-imposed deadlines.
The Bundesbank’s Weidmann seemed to draw his own line today, suggesting that monetary accommodation to this point is justified (though reports suggested he objected the recent rate cut), but he said it was “not sensible” to signal further monetary easing now. There had been some speculation of additional action by the ECB next month, but Weidmann’s comments would seem to reduce the chances. Although Weidmann may be in a minority, the way in which decisions appear to be made, some compromise would likely be reached after apparently out-voting Germany last time. Moreover, after adjusting the price of money, the ECB may be turning its immediate attention to the quantity–excess liquidity, contracting loans, collateral).
There is a slew of US economic reports, including retail sales, CPI, existing home sales and business inventories. There is some risk that the government shutdown leads to a weaker retail sales report, which however should bounce back in the next series. CPI is trickier. The impact of the government shutdown was to reduce the time collecting data. Existing home sales are expected to have slipped for the second consecutive month in Oct. Sept business inventories are unlikely to move the markets, but may be used by economists to fine tune Q3 GDP revisions.