Daily Note – Mark Carney: The Lucky General


United States: Headline CPI weaker than expected but core prices tick higher.

What’s the difference between a Fed taper tomorrow or in January?

Euro zone: Better than expect ZEW and CPI data fails to lift the Euro

United Kingdom: Carney’s perfect storm –more jobs, less prices


Good morning and welcome to Global Macro 360 °.

I’ll be writing up my thoughts every day for you before 11am GMT. I hope you enjoy it and find it useful.

Ahead of the Federal Reserve meeting later today, global financial markets are caught in two minds..

US stocks benefited from a short covering rally on Monday and yesterday it was the turn of the US fixed income market. The US 10 year dropped by 4bps back towards the key support of 2.82%, finishing the day at 2.84% .The move lower was attributed to the weaker than expected headline CPI  number but with the core actually ticking higher, like the move in stocks on Monday, it was all about positioning and low volume Christmas trading.

I will talk more about this in the new year but it is very interesting to see lower headline CPI amongst the G8 largest economies .This is primarily a function of lower energy prices, leading to lower food prices as petrochemicals are such a huge part of modern fertilizers so when the price of energy falls, one of the key inputs into food prices falls too. For some rather eclectic views on the food, food prices and global food security have a look here

and here for my views on the intersection of demography, food and prices here in a speech delivered in Sydney last year.

United States: Headline CPI weaker than expected but core prices tick higher

18TH 1

The US NAHB housing market index 58 vs 55 expected the highest since August. The index has levelled off after a surge between late-2011 and mid-2013. There are very few people talking about upside risks to housing in the next year or two, but if there is a surprise in growth, don’t rule out the housing market because we know that the housing market, if the deleveraging cycle is over (and I think it is), can become leveraged again very quickly.

The impressive turnabout in the US external position continues. The Q3 US current account balance was  -$94.84bn vs -$100.0bn expected. The prior -$98.9bn. was revised to -$96.61bn.

The deficit falls to the smallest in four years and pushes the percentage of GDP down to 2.2% and the lowest since Q1 1998 in the good ole Clinton years. Improved export numbers led the way as well as high earnings from US corporations overseas. Can you imagine what would happen to the US current account if the Democrats on Capitol Hill get their way on the repatriation of corporate America’s profits which are currently squirelled away all around the world?

What’s the difference between a Fed taper today or in January?

From a trading perspective, there is barely any difference between a modest $5-10 billion taper today or a strong signal about a taper in January. The Fed has always taken the path of least resistance, so no taper today but a signal for January would fit with the pattern under the Bernanke Fed.

In my mind, the difference would be minimal. The market reaction will be volatile if a ‘no taper’ or ‘taper’ headline hits; and that’s all that matters for the first 3 minutes of post-Fed trading.

There will be a big difference in the knee-jerk reaction but like home goals at White Hart Lane it won’t last and reality will kick in in due course..

What will last is a change on the forward guidance and other comments. I think drawing a line under inflation is a good possibility and so is signalling that rates will stay low for longer. Some additional optimism on the broader economy is a given.

The risk? This is a stock market that likes to kick and scream and that could spill over elsewhere. Overall, the dollar is likely to benefit from a taper or a signal about a January taper. In that case, USD/JPY looks like the best bet. With no taper signals and/or direct warnings about disinflation, the dollar could be in a bad spot. In that case, EUR/USD is likely to break out to new yearly highs above 1.3830.

If the Fed do not “taper” today, Bernanke might use the Q&A to guide toward a January taper. The 30 minutes between the FOMC decision and the press conference could be an opportunity to buy a dip in the US dollar.

Euro zone: Better than expected ZEW and CPI data fails to lift the Euro

18TH 2

Currency traders showed yesterday just how focused they are on the Federal Reserve meeting later today.

Despite a better than expected ZEW number and a stabilisation in CPI, they failed to take the Euro higher. The ZEW Institute expects the economies to improve further in Germany and the Euro zone. It says 84.6% of survey expect no change in short-term interest rates in next 6 months. The main reason for a strong increase in sentiment is  a better outlook for the US economy.

They say the recession is bottoming out in the Euro zone and there could be room for more growth than the forecast of 1.5% in GDP in 2014. Although I am not too sure about this at all, given that  money supply and bank lending are still contracting  in the Eurozone, it’s hard to see where this lift is going to come from. And we know that the whole world is banking on export led growth, but we can’t all export because if so, who is doing the importing? Also, France is weakening alarmingly quickly and a cyclical wobble exposes the 5th Republic’s deep structural problems at a time when no French President has ever been as unpopular or ineffectual. See our note from Monday here.

As we saw with the flash PMI prints on Monday, the dislocation between Germany and the rest of Europe continues to widen.

This was all confirmed by Letta – the Italian PM’s atatement this morning “the EU should work together to lower Euro/dollar exchange rate”. If that isn’t Italian industry screaming for a competitive devaluation, I don’t know what is!

United Kingdom: Headline CPI move towards the Bank of England target


Now that Mark Carney has been outed as an Irish passport holder and fully paid up member of the great Irish Tribe, our near neighbours can rest easy – they are in good hands! And if nothing else, Carney is the type of general  who Napoleon would have favoured: a lucky one.

Today he got an early Christmas present and what all central bankers yearn for – lower unemployment and lower inflation.

UK unemployment fell from 7.6% to 7.4%. We are now within 0.4% of the Bank of England’s 7% target, the point at which Carney said he would have a second look at things.

A drop in the headline inflation in Blighty but core rises from 1.7% to 1.8%. Again, food and utilities lead the fall in the headline number. Even though inflation has fallen to a four year low, the falls aren’t a problem as it means prices are  getting back to the BOE’s target.

The fact that core isn’t falling also suggests we’re not seeing a weak inflation picture like the rest of Europe – that’s hardly surprising when the traditionally inflation-prone economy is moving ahead strongly.

GBP was lower on the headlines CPI number but find some support as this brings higher interest rates one step closer according to the BOE forward guidance.

Finally in the UK yesterday we saw the best CBI Industrial trends data in 18 years. “While risks remain in the euro zone and beyond, this survey provides further evidence that the recovery is becoming more embedded,” said Stephen Gifford, the CBI’s director of economics.

They are doing just fine across the Irish Sea and if Liverpool can sign up Suarez for a few more seasons, even the Scousers might have something to cheer about this Christmas.


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