Daily Note – The riddle of the sands

Abu Dhabi


S&P 500 closes at an all-time high as the situation in Ukraine calms

United States: Better Core Durable Goods

United States: Very little news from Janet Yellen

Eurozone: Continued weakness in EZ Bank Lending as inflation higher than expected.



Good Morning,

This weekend I head to Abu Dhabi for one the best conferences in the economic and financial calendar. The NBAD annual bash is a gem. The guys at NBAD get great guests and put on a fantastic show. If you want to know what policy makers are really thinking this is the one for you. I have had the privilege of speaking at this for the last three years and this year I will be speaking just after Larry Summers and just ahead of Ben Bernanke – so no pressure there!

I will keep you posted on what I hear and the conversations I am having all week. It should be fascinating.

Meanwhile, “resilience” should be the theme of the week. The first instance of resilience is the S&P.

S&P 500 closes at an all-time high

The market believes that things (for now) may be calming down in the Ukraine. I don’t by the way. I think it is only really beginning. Russia has said it is ready to work with the West but any agreements must be implemented and take into account the interests of all Ukrainians.

The US globetrotter John Kerry spoke to Russian foreign minister about cooperation. The downside to those comments is that Russia says the interim government is not a government of national unity but “a government of winners” that include extremists –which is true.

There’s a long, long way to go and we know that in this region America  can offer a bunch of flowers in one headline and a hand grenade in another, so we need to stay focussed for now. We also know that this is Russia’s neighbourhood and any impostors will be treated as such.

In the meantime, the market powered ahead.

United States: Data is still very mixed

Table 1 28 Feb

You can read what you want from the latest data. It’s not strong enough for my liking and I will keep the comments brief. Headline durable goods orders fell 1.0% in January (vs. consensus -1.7%). Civilian aircraft orders declined 20.2%, consistent with the drop in Boeing aircraft orders reported for the month, although defence orders jumped 23.1%.

Core capital goods orders rose 1.7% in January (vs. consensus -0.2%), boosted by a large gain in fabricated metal products (+7.3%) and strength in computer and electronic products (+4.7%).

There’s still too much fog and as the market is bullish everyone wants to pick out the bits of the data they like and discard the bits they don’t.

Initial claims for jobless benefits stood at 348,000 in the week ended February 22 (vs. consensus 335k). This is an increase from the previous week’s 334,000.

United States: According to Yellen the recent data doesn’t spell less tapering

Given the recent string of weaker economic data, Yellen briefly deviated from her prepared text during her introductory remarks, noting that “…a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point it is difficult to discern how much.”

Responding to a question from Senator Schumer on whether the Fed would cease tapering in light of the recent data, Yellen said that “if there’s a significant change in the outlook, certainly we would be open to reconsidering, but I wouldn’t want to jump to conclusions.”

When asked about potential imbalances in financial markets due to  monetary policy, Yellen stated that “at this stage I don’t see concerns.” However, consistent with past statements from Federal Reserve officials, she did highlight “pockets of concern” including underwriting standards in leveraged lending and farmland prices.

Frankly a junior analyst could have given these answers, but as it was the boss of the Fed, I suppose we should listen. I still think the market is in for a shock when it finally realises how dovish Yellen will be.

China: Yuan has fallen to within a hair of its limit-down

The onshore yuan is allowed by the PBOC to trade within +/- 1% of its reference rate on any one day. It has fallen 0.96% today. It has weakened 1.64 % against the US currency in the last nine days.

Strong suggestion that PBOC is deliberately weakening the yuan to flush out the speculators. While China equities traded lower in the week on the Yuan weakness, the second half of the week was a lot better as the market digested the fact that the Yuan weakness is more down to speculation than fundamentals.

Eurozone: Continued weakness in EZ Bank Lending as inflation higher than expected.

Table 2 28 feb

Lending to non-financial corporations (NFCs) fell by €5.8bn in January in the Euro area. Yet, flows of credit rose in Spain, for the first time in over three years.

Across the Eurozone, lending to non-financial corporations declined by €5.8bn in January. This follows a €0.2bn decline in December. Lending to non-financial corporations continues to contract, but it is now doing so at a slower rate than a year ago (Chart 1).

Loans to households rose by €0.4bn in January, having fallen by €4.8bn in December. Unlike corporate lending, loan growth to households remained broadly unchanged between early 2012 and early 2013.

Italy saw the largest declines in lending yet it is a country where the stock market has jumped dramatically. The stock of loans outstanding has contracted by 29% in Spain and by almost 10% in Italy since July 2011.

Figure 1: EZ Bank Lending & German Core CPI

EZ Chart 28 feb

Portfolio: China ETF rebounds strongly, euro weighs

Table 3 28 feb


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