Daily Note-Ireland’s exit, Friday 13th revisited?


United States: Strong retail sales numbers see the market moving further to price in a “taper” from the Federal Reserve next week

Stanley Fisher, an interesting addition to the FOMC

Australia: The AUD$ can’t catch a bid as central bank and government comments send it crashing below .9000

Japan: Speculation of further easing from the BOJ early next year



Good morning,

Today is an auspicious day for Ireland and the EU. We leave the bailout after three years under the watch of the IMF and the others. Lots of political backslapping from the politicos – fully paid up members of what I term “bureaucratic Ireland”. In the real world, what I term “business Ireland”, things are slightly different. The recovery is weak and is occurring despite, not because of government policy.

However, we are now on our own and must get on with things.

The State is well funded with €24 billion of a war chest built up. There are few things on the near horizon to suggest that we need to be overtly worried. But further out, I am concerned about a bomb going off under all the banks, including Bank of Ireland.

Here are my views from CNN. Also on Newstalk Radio with Pat Kenny and in The Irish Independent. And thoughts on the Irish banks here in The Sunday Business Post.

Now one thing that will affect the Irish economy in the next few months will be what happens across the Atlantic, particularly at the long end and in the currency markets. Looking due west from our little island, we see the market taking a hammering as talk of imminent tapering reached cacophonous decibels.

United States: Strong retail sales numbers

Overnight, the broad market (stocks, bonds and the USD) begins to price in a higher chance of “tapering” from the FOMC next week. Boosted by some good retail sales numbers and the budget deal in congress, US bond yields are now trading close to the highs of the year. The USD was particularly strong against the YEN and the AUD – both making yearly lows against the USD as interest rate expectations of USD assets pick up. (More on Australia later.) Stocks continued to trade weaker and interestingly, this week some $6.5 billion was withdrawn from equities. This was the largest weekly outflow since the August 2011 US debt downgrade; the second largest outflow since March 2009 ; and the fifteenth largest in the last decade.

Politically, at least the Republican Party are beginning to realize that they have to be a serious outfit, and in politics that means compromise and facing down the more bonkers elements on the Right. Last night, legislation on the budget compromise was passed by a margin of 332 to 94 and will head to the Senate next week.

In the real world, Americans are spending again buoyed up by better income and a firmer housing market, but things are still mixed on the jobs front, which will, I suspect, keep the Fed sitting on its hands on Wednesday.

So initial jobless claims were up to 368,000, suggesting that the labour market isn’t quite as buoyant as first expected and as suggested by recent non farm payroll. Despite this, November advance retail sales increased +0.7%. A little bit better than expected and maybe, more to the point, there have been upward revisions suggesting more consumer strength.

The biggest gains in retailing were, not surprisingly, online where sales surged by 2.2%. And, reflecting more buoyancy in housing, furniture and electronic sales were up strongly too.

Taken together, it all brings the Fed a step closer to acting next week. I have been surprised at how reluctant the majority of Investment Bank research teams have been to move to a December “taper” ; the vast majority are still in the January and March camp. I wonder, having been burned so badly in September, are the investment banks reluctant now to change their predictions for the second time this year.

I suspect that the Fed will do the investment banks a favour and hold off.

The market is moving upwards anyway. US 10 Year yields are approaching the key 3% level (high of the year). Regardless of what happens next week, there may be some squaring of positions ahead of Christmas. The important thing to understand from this chart is the trend is up. We can expect higher rates for 2014 and the market may be getting ahead of the Fed.

Friday 13th

Stanley Fischer an interesting addition to the FOMC

Such has been the dehumanizing of financial markets, with millions of punters gawking at screens through a blizzard of numbers, we can sometimes forget that people matter, particularly people in senior positions.

One such person is Stanley Fischer, the former Bank of Israel governor who is President Barack Obama’s choice to succeed vice chair Janet Yellen on the Federal Reserve Board, Bloomberg reports.

Many years ago, I was the Israeli economist for UBS and spend a lot of time in the region just when Fischer took over at the Bank of Israel. For more insightful stuff on Fischer please see my old friend, a Kilkenomics regular, and for my money, the best Israeli analyst around Pinchas Landau

Fischer, 70, has reportedly been offered the job already and now awaits Yellen’s Senate confirmation as the new Fed chairman. Fischer would bring strong academic credentials to the job – not that that should matter too much. And by the way Yellen is no stranger to academics, she is a formidable academic herself and just for good measure, she is married to the Nobel Prize winning economist George Akerlof.

Fischer is no slouch either having served as a professor of economics at Massachusetts Institute of Technology where one of his students was Fed Chairman Ben Bernanke and he has also taught the current ECB head Mario Draghi. For those of you partial to conspiracy theories and worried about just how small the policy making elite actually is, these tight relationships will make the hair stand up on the back of your neck!

Fischer is a crisis-management veteran having navigated Israel through the financial crisis with little if no economic downturn and he is reportedly optimistic about the outlook for the U.S. economy in 2014.

“The American economy is beginning to grow at a faster pace, people are less worried about the global economy than they were 6 months ago; the situation is a little better. I think 2014 will be better for the global economy.”

This quote comes from a local paper in Israel, and hopefully brings a degree of pragmatism to the Federal Reserve in 2014. Rightly or wrongly, the market perceives Yellen as dovish above and beyond Bernanke.


Around this time of year the Etihad planes from Sydney to Dubai are full of Irish emigrants heading home. I regularly take the Dubai-Dublin leg of the journey and am always surprised around December at the amount of young Irish people coming home. Last year, I spoke in Sydney and a flight attendant  told me that the December flights back to Dubai were the best fun and she was asked out more times by Irish lads after a few gargles than she can remember! (I never got a straight answer from her as to whether she accepted the amorous advances.)

So at this time of year Australia looms large with me and also because I have a short position in Australia, I am always concerned about whether the Lucky Country remains lucky.

Overnight, the AUD$ can’t catch a bid as central bank and government comments send it crashing below .9000

The AUD$ had one of its weakest days of the year driven by a headline that the RBA head Stevens was looking for a 0.85 AUD/$.

This morning’s Sydney Morning Post headline:

‘We need a dollar close to US85¢: Stevens’

But in fact, Stevens never says that. This is the key part of the interview.

“…Mitchell: In the SMP I got the impression that you were looking for depreciation on the order that we saw earlier in the year. On the exchange rate as it was at the time I inferred from that we were looking for an 80 cent dollar.

Stevens: I am not – you know, I’m not going to sit here and put numbers on these things. I don’t think the extent of our knowledge about what’s correct is that good, but I did think 95 was rather too high. I thought 85 would be closer to the mark than 95 at the time we started to make some comments some months ago, but, really, I don’t think we can be that precise. I just think that if things over the medium term evolve as we’re presently assuming – and I think it’s reasonable to make these assumptions – it’s going to be surprising if a nine at the front is the right number…”

It shows the power of headline writers but it also shows that it doesn’t take much to slam the Aussie lower. Also weighing on the Australian dollar are comments from Prime Minister Abbott who told parliament about an $8 billion grant to recapitalize the RBA.

That enables the Reserve Bank to intervene prudently and appropriately in the market to try to ensure that the Australian dollar is at the best possible level,” he said.

The thing is, $8 billion is virtually nothing if you want to intervene.

The Australian dollar tumbled more than a full cent after the dual comments from Stevens and Abbott. The fall ran out of steam in the low .8900’s. The chart below illustrates why I only have a small allocation to short AUD$.

Interest rate differentials between the US and Australia are now supportive of AUD assets and should, over time, support the AUD$. I much prefer the short end of the bond market in Australia, where I am long on the Dec14 bills. I have talked about this trade many times in recent weeks.

Aussie dollar potential

Japan: Speculation of further easing from the BOJ early next year

USD/JPY has broken above the November high of 103.38 late in US trading to as high as 103.42. The gains come on taper talk and a broad yen weakness. The Nikkei newspaper ran a story overnight that further easing was expected by the spring of next year from the BOJ. Reading the detail of the story, there was little of note in it, it was more just a research note from one of the Japanese banks. It didn’t stop USD/YEN trading to a new yearly high of 103.92.


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Categories: Daily Note

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