Daily Note – We’ll always have Paris.



United States: US stocks rally as GDP comes in as expected but big drop in pending home sales takes the shine off

Japan: Higher CPI gives encouragement to the Abe government

United Kingdom: Mortgage approvals at the highest since Jan 2008

Eurozone: EZ inflation and German retail sales head lower


Good morning,

 As Bogart said to Bergman, “We’ll always have Paris“, but my concern is what shape will Paris be in?

I am looking at the glorious (but covered up for refurbishment)  Pantheon, watching the world go by and thinking to myself how little things change. Paris is still beautiful, but its beauty speaks of a former time. A former era and time when France was strong .

I am here in the French capital to do a piece of economic/political cabaret , with amongst, others, the wonderful novelist Donal Ryan, who’s book the Spinning Heart  is a must for anyone who wants to understand what happens to communities in a post credit/banking/housing crash apocalypse. It should be required reading for Australians!

Speaking of housing busts and things changing so little, data from the  UK and the Eurozone this morning, reiterate that one area – the sterling area – is about to have to deal with inflation, driven by houses and one area –the Euro area – will have to deal with deflation driven by policy.

It is amazing how things change so little. The French elite believe that deflation is a necessary price of keeping up with Germany. Eurozone price data just published in the last few minutes, point to deflation with its attendant ugly bridesmaid, unemployment.

 As a result of a deflationary bias, domestic demand shrinks and the  French rate of unemployment continues to grow.

Latins on the dole

In contrast across the channel, the UK is again playing with fire. The FIRE economy – Finance, Insurance and Real Estate – gets the UK into trouble time and again. But in the near term, it drives down unemployment as we see from the chart above and as we spoke about in our recent note on the NIARU.

This morning’s news that mortgage approvals rose from 70,800 in November to 71,600 in December and have risen from a low of 47,200 in July 2012. All this means that mortgage lending is at the highest level since January 2008, the Torys are going to engineer a “feel good” boom to try to win the election, sterling will go further north as will interest rates. It feels like 1988 all over again, except Man City are on top of the league!

United States: US stocks rally as GDP comes in as expected but big drop in pending home sales takes the shine off

Table 1 31 JanThe devil is in the detail as always and while US stocks rallied yesterday on GDP news, the housing numbers in the US give cause for concern. In my book, you can’t have a recovery in a English speaking country without a buoyant housing market. Simple as.

Volatility of equity markets has picked up dramatically since the start of the year.  Price moves, both up and down, will be larger and more pronounced than for most of last year. A pickup in volatility makes equity market uncorrelated. This explains our interest in trying to play the relative outperformance of China stocks against the poor performance of French stocks. We will have more on this idea next week.  Let me kick around Paris a bit more and talk to a few more people before we decide.

Real GDP in the US increased at a 3.2% rate in Q4. Personal consumption expenditures rose a smaller-than-expected 3.3% (vs. consensus 3.7%) – still the fastest rate since 2010. Business fixed investment rose 3.8%. Equipment investment rose a solid 6.9%. Business inventories rose too. Residential investment declined 9.8%, reflecting in part the lagged impact of weaker housing starts in past quarters. This worries me.

Net exports were also a strong positive contributor, adding 1.3 percentage points to growth. Federal government spending fell by 12.6%, which we expected and this pushes total government spending down 4.9%.

The Commerce Department estimated that the federal government shutdown subtracted three-tenths from GDP growth. Although the composition of the report was slightly softer than expected, solid 2.9% growth in real final sales is a good sign.

But here is the tricky bit.

Pending home sales dropped 8.7% in December (vs. consensus -0.3%). This is the largest decline since the expiration of the first-time homebuyer tax credit in 2010.

Sales declined in the Northeast (-10.3%), West (-9.8%), South (-8.8%), and Midwest (-6.8%). So from “sea to shining sea”, Americans didn’t buy houses. This is not good at all for domestic demand.

I am getting increasingly concerned that we are going through a “semi” soft spot in the US economy. Next week’s January survey and employment data will give us some further insight into the growth outlook for the US economy.

Despite the less than inspiring data, US bond yields moved higher with our 5 year note position back to 1.52%. We added on Wednesday to our position at 1.489%. We have plenty more US data later today including Personal Income and Spending for December.

Gold is getting whacked again. Yesterday it was down $25. Gold bulls have had some success since the start of the year, it will be interesting to see what the reaction is to the first significant down move.

We remain of the view that “tapering” and higher rates is bad news for  gold bugs but is it all in the price now?

Japan: Higher CPI gives encouragement to the Abe government

Table 2 31 JanThe ‘national’ CPI figures are all above or on expectations, which has to be a positive for the administration. The Abe government’s entire credulity  is dependent on achieving a “headline” CPI target of 2%. With Japan being such a large importer of energy this can be achieved purely by burning your currency but this is not the type of inflation they want. The question is can you pick your type of inflation?

The government wants retail inflation which changes peoples’ price expectations bringing forward spending to avail of bargains today. This means retail inflation expectations have to rise. This means local not imported inflation is what they need.

Just one more thought, as energy prices rise in Japan as a  result of the weaker Yen, pressure is mounting on the government to reopen the nuclear power plants.

We remain medium term bearish on the Yen (further policy action expected by the BOJ in H2 2014) but its correlation to the “risk on” trade  makes us cautious in the short term. We look to buy USDYEN on dips below 100.00.

United Kingdom: Mortgage approvals at the highest since Jan 2008

Table 3 31 JanMortgage approvals rose from 70,800 in November to 71,600 in December. Mortgage approvals have risen from a low of 47,200 in July 2012. We are now at the highest level since January 2008. However, approvals remain relatively low by pre-crisis standards, when they averaged over 100,000 per month.

The weighted average of interest rates on new mortgages edged up from 3.05% to 3.06% in December, yet it remains close to its record low of 3.04% recorded in October.

All this makes it more likely that the Brits will be forced to move on rates before the end of the year. The market is given a 70% chance to a 25bps increase in the base rate before the end of the year. Expect the odds on this to shorten.

Eurozone: German inflation and retail sales head lower

Table 4 31 JanFollowing on from the weaker than expected CPI data out of Germany yesterday, we have a weak retail sales number this morning. It is a weak number and reiterates the deflationary bias in the core of Europe. I will write more on this on Monday after I have sampled this deflationary phenomenon  here in Paris over the weekend. Will keep you posted on Twitter and in Monday’s analysis.

Table 5 31 Jan

EZ headline inflation came in weaker than expected. This increases the chance of further action by the ECB, if not next week, in March. Draghi next week will have to answer the big “D” question. Does he think “deflation” is a risk? Euro targeting key support at 1.35

Portfolio: Euro approaches key support at 1.35

The euro has moved materially lower since the FOMC decision to continue to “taper” on Wednesday evening –which we like. We are now approaching the key support level of 1.35. A break of this level should attract some new shorts.

Portfolio 31 Jan

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