Steve Johnson has been hard at it, writing away in the Financial Times:
“The chief problem for the yen is that the flattening of the US yield curve has made it uneconomical for Japanese investors to hedge their ongoing purchases of US Treasuries, but a falling yen encourages overseas investors to hedge their purchases of Japanese equities – negating the value of these latter flows in currency terms.”
Well the G7 meeting has come and gone, but I’m not sure how much the world is going to notice the fact. If I had been a fly, perhaps I would now be glad I hadn’t wasted my efforts. Basically there is a ‘shift’ from focusing on the oil issue to the inflation one, but given that in the two countries which are now driving global growth – the US and China – inflation is coming slowly but surely under control, I would have thought that this was to start to fall behind the curve instead of getting out in front of it. Put another way, since I am sure the Fed will push on through with the measured pace till the last drop of inflation oil is squeezed out of the US economy, I sure as hell don’t imagine that inflation is going to be tomorrow’s issue, and I guess this is the bit that the markets are really interested in.
“Finance ministers and central bank governors from the world’s leading economies have warned of increasing inflationary pressures, adding to concerns over rising protectionist sentiment and global trade imbalances….The warning on inflation came as the US Federal Reserve continues to tighten monetary policy and follows the European Central Bank’s quarter point rate increase last week – the first in five years. The Bank of Japan has also started to prepare the ground for an eventual curtailing of its exceptionally loose monetary policy.”
I think, btw, that the G7 are right to stress the importance of higher oil prices in the longer term as a constraint on the consumer, but this is ultimately a terms of trade effect – final consumption in the OECD world is squeezed as petro dollars mount up elsewhere – rather than an inflationary one as long as the monetary authorities keep the lid on ‘second round effects’. If you wanted to be really cynical you could say that the US government deficit was working as a giant paddle to keep the flow of funds moving, converting all those accumulated petro dollars into final consumption, but somehow I doubt Brad Setser would want to see things like this.
One of the things about targeting expectations, and factoring-in changes, is that the world moves on at a very rapid clip these days. So the ECB rate rise in now, really, yesterday’s news. The big issue today is the fact that the easing cycle in the eurozone may already be over (we need to see the data going forward before we can be sure about anything here). Anyway, one thing the markets are sure about is that eurozone interest rates aren’t going anywhere very significant in the near future, and one of the consequences of this is the fact that 10 year German bund yields are on their way down again, as is the euro. (On this I continue to maintain my long held view that the situation is asymmetric: good news from the US, and bad news from the eurozone will send the dollar up, while the opposite will simply see exchange rates marking time. All of this has a floor, of course, somewhere, but I think we are still some distance from touching it). Of course all of this implies that the dangers of yield curve inversion in the US are now real and ever-present.
European bonds may gain for a second week, their first back-to-back set of increases in more than three months, on speculation any interest-rate increases from the European Central Bank will be limited.
The ECB raised its benchmark rate to 2.25 percent yesterday, the first time it has lifted borrowing costs in five years. ECB President Jean-Claude Trichet said the increase left rates in line with the bank’s goal of containing inflation, sending bond yields to a one-month low.
“There will be no additional rate hike immediately after this one, and the cycle will end at a relatively low level,” said Kornelius Purps, a fixed-income strategist at HVB Group in Munich. “That should be supportive for the bond market.” Economists at HVB forecast one more rate increase of a quarter percentage point next year.
The dollar rose for a second day against the euro on speculation a government report will show the U.S. economy added the most jobs in four months in November.
The U.S. currency also headed for a third week of gains versus the yen on speculation faster growth in the world’s largest economy will prompt the Federal Reserve to raise interest rates faster central banks than in Japan and Europe.
“There are no signs that the economy is slowing down,” said Niels Christensen, a currency strategist at Societe Generale SA in Paris. “Rate expectations in Europe and Japan are no match for the Fed, and so the dollar will keep rising.”
I’d simply love to be a fly on the wall in London this weekend. The G7 finance ministers are about to meet the central bankers, and as in by now well known, these two groups haven’t exactly been hitting it off too well lately, at least, and better said, in Germany and Japan they haven’t.
In particular I would like to hear John Snow’s contributions. Snow notoriously is banking on growth in Europe and Japan to ease the US out of its trade imbalance. But being pro-growth in the present context would seem to imply a stance on interest rates. The central bankers are worried about global liquidity and the danger of US yield curve inversion ( and here, for a very interesting discussion of the topic – certainly the best I’ve seen – from the Morgan Stanley GEF team). So one group want to put rates on hold, while the other wants to raise them, Snow is in the middle, but will he come off the fence?
Brad Setser has a post which has some relation to this.
Brad seems to take the view that a big part of the explanation on global imbalances is the US fiscal deficit. I beg to differ. Indeed I think Brad is in danger of putting himself on the wrong side of an old (1930s) argument that probably he wouldn’t want to be on the wrong side of.
Let me explain: the important thing to watch is the global economy (not the local examples, US, Germany, Uk, China etc – Hat-tip to Andy Xie hear although I don’t have the direct link handy). Now what is important is the global equilibrium, in terms of the sustainable global growth rate. Now……. simply applying a restrictive fiscal policy and a tighter monetary one in the US would bring the budget into balance and the external trade deficit down, but what would happen to the level of employment (in the US and globally)? What would be the knock-on consequence for growth in China? Would this be a ‘better’ equilibrium than we have now, would it be more sustainable? Somehow I doubt it. And I think that is why we need to address this issue globally.
Which takes me back to being a fly on the wall in London……
The results of the latest GfK’s consumer confidence survey are just in. The results are hardly a surprise. (Btw there is a good discussion of consumption in Germany in this post and comments):
Consumer confidence in Germany, Europe’s largest economy, fell for a second month in three as Chancellor Angela Merkel’s government decided to raise sales tax.
GfK’s confidence index, based on a November survey of about 2,000 people that aims to forecast household spending one month ahead, fell to 3.1 from last month’s revised 3.3 reading, the Nuremberg-based market-research company said in an e-mailed statement today. GfK reiterated its forecast that private consumption won’t increase more than 0.2 percent this year.
Higher energy costs are leaving German shoppers with less money to spend in the holiday season while the prospect of a sales tax increase and an 11.6 percent jobless rate dent sentiment. With the European Central Bank poised to raise interest rates as soon as this week, increased borrowing costs will also crimp spending.
Incidentally Wolfgang Munchau in the FT today states that the recent announcement by Jean-Claude Trichet that the ECB was going to raise eurozone rates “must rank as one of the most bizarre monetary policy decisions of recent times”!
Who am I to disagree.
Just when he’s left the FT concludes that Schroder’s labour market reforms are in fact working. It is perhaps worth bearing in mind that although the German economy is producing a lot of jobs, a very high proportion of these are temporary.
Controversial labour market reforms introduced in Germany by Gerhard Schröder in 2004 are showing results, according to data published less than a week after he stood down as chancellor…..The state-run BA employment service in Nüremberg said the total number of job placements by employment offices across Germany would exceed 1m this year, an increase from 496,000 in 2004. The average length of unemployment had fallen from 22 months a year ago to about 21 months today – a downward trend that was set to continue next year.
The idea that there was a global savings glut now having gone out of fashion, some are presently arguing that what we have is an investment dearth (my own view is that these two effectively mean the same thing, since the issue is a relational one). More evidence for this investment dearth hypothesis comes today from the UK.
UK Business investment grew sluggishly in the third quarter, official figures showed, confirming survey evidence that British-based companies are cautious about capital spending even though profit levels are high.
As the FT also notes:
Just as in other European countries, companies have decided to save most of the money they have been making rather than risk investment in new opportunities to generate profit in the future. The reluctance of companies to invest when interest rates are low and the return on the existing capital stock is high has puzzled economists for some time.
Dave Altig had a piece earlier in the week about the BoE rate decision wher he tries to put a brave face on the UK data. This investment news is another little bucket of cold water for the upside optimists. I’m more or less neutral here. The monetary policy committee intimate that the weakening of investment intentions “may also reflect uncertainty about the near-term outlook for the economy in the face of sluggish consumer spending and higher energy prices”. Dave concludes that “Perhaps the uncertainty will lift sooner than later”, and I agree, I’m sure it will: I’m just not sure which way the resolution of the quandry will lead us.
I know you should never take what a central banker says at face value, but still. Today Christopher Swann in Washington tells us (in an article entitled: End in sight to the Fed’s rate-tightening cycle – and with no question mark):
For much of the past year and a half the Fed has been running almost on autopilot, with rates being raised from their historic low of 1 per cent in June last year to 4 per cent now in a lockstep of quarter-point moves. None of the economic vicissitudes over the past 18 months – from Hurricane Katrina to surging energy prices – has diverted the Fed from its gradual task of bringing rates to a more neutral level.
But this week’s minutes suggested in the clearest language yet that this task is almost done. In 2006 any further rate rises will have to be justified by surprising economic data, the Fed’s internal discussion appeared to indicate.
For the first time since the rate-tightening began, some of the members of policy-making committee also warned about the dangers of going too far
Meanwhile, back home in the UK, Steve Johnson has this:
“In contrast to the ECB’s caution, comments from the US Federal Reserve hinted at several more rate hikes to come.
Michael Moskow, president of the Chicago Fed, suggested that the Fed funds rate would rise above the “neutral” level expected by the market. “With inflation at the upper end of my comfort zone, an unexpected increase in inflation would be a serious concern.”"
So come on lads, get your act together, which is it, almost done, or plenty of juice left in the lemon yet awhile?
Whatever the underlying reality behind all the news headlines about ‘panic in Harbin’ one thing is sure, there are plenty of asymmetries pending resolution between the ultra-modern and sophistocated new-technology China and the ‘informationally closed’ political system which breeds a lack of trust and the kinds of over-reaction we are now seeing. China obviously badly needs to ‘modernise’ in the ‘welcome to modernity’ sociological sense. If it doesn’t there will always be the danger of this kind of ‘chain reaction’, and clearly, in the conext of modern integrated financial markets, the consequences could turn out to be particularly unpleasant for everyone involved.
Thousands of residents of Harbin on Wednesday night jammed its railway station and booked out all available flights as a deadly 80km toxic slick made its way down the Songhua river, threatening to poison the north-eastern Chinese city’s water supplies. he slick of benzene and other toxins was leaked into the river, the city’s main source of water, after a series of explosions 10 days ago at a chemicals factory 200km upriver. A mood of distrust and paranoia was spreading through the industrial city of 9m people, sharpened by the local government’s decision to turn off water supplies for four days for fear of an environmental catastrophe.
First off, Dave at MacroBlog has a good summary of the core of the economic policy programme adopted by the new German government. He also has some to-the-point comments about ECB credibility issues
But the big news today must surely be the surprising state of the European consumer . Perhaps the most indicative reading on the situation comes from a report from business consultants Deloitte which states that spending on xmas gifts is expected to fall this year by an average 3 per cent (year-on-year) across nine European countries. Revealingly they find that 49 per cent of Europeans believe their economies are currently in recession.
Now that German domestic consumption is declining comes as no surprise. Economic theory offers us sound explanations as to why this might be the case, nonetheless the pace at which this decline is progressing is pretty striking:
Third quarter growth figures for Europe’s largest economy released yesterday showed that after five years of stagnation, Germany’s economy is locked in a schizophrenic phase. On the one hand the country’s robust exports, which rose 4.7 per cent from the second quarter, are finally translating into stronger investments, up 2.2 per cent.
But consumption, an essential ingredient of a healthy recovery, fell for the third consecutive quarter, pressed by high unemployment, stagnating disposable income and a broader crisis of confidence.
Hanging as a twin threat over this one-legged recovery are the prospect of an imminent rise in eurozone interest rates and Ms Merkel’s pledge to cut spending and raise taxes to restore the country’s public finances by 2007.
However, the recent news from France does come as a surprise. Economic data from France had been rather more encouraging lately, and thus the fact that French consumer spending on manufactured goods declined for a second successive month in October – down by 0.6 percent from September, when it fell a revised 0.3 percent – does come as something of a surprise, and is probably like a bucket of icy water over in Brussels and Paris, and, possibly more importantly, over at the ECB in Frankfurt.
It was only last Monday that Morgan Stanley economist Eric Chaney was taking IMF chief Rodigo Rato to taskfor the latter’s argument that “it would be good to see more internally driven recovery” before starting to normalise interest rates. Chaney took the opportunity to make a full-frontal-assault on what he calls “the legend that only exports explain euro area growth”.
“Since 2003, the contribution to growth of external trade has been constantly negative or null for the euro area, while almost constantly positive for Germany. The French GDP data out on November 18 are confirming this once again: French final domestic demand was up 0.9% in Q3 (3.5% SAAR), driven by strong consumption (0.7%Q despite a sharp drop in food consumption) and even stronger corporate capital spending (1.1%Q). ”
Now normally I would be agreeing with him, since as he says the ‘legend’ is derived from the fact that many analysts take Germany as a proxy for the euro area, and this can be deeply misleading. But this latest round of data counsel caution (and maybe some of that caution could have been reflected in Jean-Claude Trichet’s performance last Friday, at least if the Central banker’s job is to stay ahead of the curve it could have been). Lesson: don’t make yourself a hostage to fortune if you don’t want to end up being hoisted on your own pettard. (And Btw: Touché Señor Rato).