Week ahead Sunday November 22 2015
11/23/2015
Zoho Mail Print
Print | Close window From
:
Alastair Winter
Subject
:
Economic Insights
Date
:
Sun, 22 Nov 2015 21:32:11 +0000
Alastair Winter is Daniel Stewart’s Chief Economist. His weekly comprehensive ‘Economic Insights’ publication, uniquely covers global market sentiment, politics and macroeconomics. Unsubscribe from this email
Follow Economic Insights on Twitter @AlastairWinter 'Incrementum inveniendum est'
Week ahead Sunday November 22nd 2015 Headlines Draghi the conjuror Data coming up: a lot of sound but little fury, signifying not much FOMC: hike and be damned Eurozone the Big Easy Osborne: getting harder Markets forecast alert
Chart 1 European equities vs Tradeweighted euro: magic or inverse correlation?
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1/8
11/23/2015
Zoho Mail Print
Source: FT
Magical Mario flexes his wand How Eurozone politicians must envy Mario Draghi! He can give the finger to the Bundesbank while exercising the power of life and death over weaker member countries. Even stronger countries can only manage passive resistance to him by ducking the structural reforms, which ironically are the better parts of his repertoire. Best of all he is not accountable to anyone, especially fickle voters. Last week he was in full conjuring mode and how the markets loved it. Chart 1 shows that historically European equities and the euro have a high negative correlation so the trick is to keep investors selling the euro while he protests this is not his aim. He also managed a further drop in sovereign bond yields as lower official rates now seem within his grasp. More powerful QE legerdemain also seems up his sleeve and equities just cannot wait. All he needs to do is link up with Santa Claus in the US and fund managers could end what has been hitherto a tricky year in truly festive spirits. There is, however, a party pooper in that many EZ banks are still not so keen to lend and businesses and households to borrow for investment or consumption. Mr Draghi may well believe in the Confidence Fairy but she is still playing hard to get. Chart 2 Eurozone investment: magic resistant since 2008
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2/8
11/23/2015
Zoho Mail Print
Data this week: plentiful but unenlightening Here in the UK, we face walltowall sneering at Chancellor Osborne as he makes his Autumn Statement on Wednesday. Both the job and the man make this inevitable and the latest data public finances certainly means he has some explaining to do. On Friday the second cut of Q3 GDP will provide much more detail on its component parts but overall is unlikely to be far away from the +0.5% (quarter on quarter) in the first cut. Mr Osborne will have been given a preview and Business Investment may well disappoint him as much as tax revenues. The US also reports the second cut of Q3 GDP and recent form suggests there may be substantial revisions, probably to higher than the first cut of +1.5% (annualised). All depends on Consumption and this week also brings the October numbers for Personal Incomes, Personal Spending and the PCE Price Index, which is the Fed’s preferred inflation measure. Only a really dramatic plunge in the data is, however, likely to deter the FOMC from hiking next month. Also due from the apparently less important business sector are Purchasing Managers (PMI) flash reports and the volatile Durable Goods Orders. Much more attention will be given to the Black Friday shopping festival that follows the more traditional Thanksgiving. An unexpected ‘closed door’ FOMC meeting has been called for tomorrow, perhaps to authorise interventions in both the FX and money markets related to the impending rate hike. Flash PMIs are also due from the Eurozone together with various other business and consumer surveys, all of which will have been conducted before the carnage in Paris. German business was already quite glum but there were hopes for France and Italy. Optimistic talk of recovery in Italy may have to be toned down unless Retail Sales and Average Wages have perked up all of a sudden. From Japan comes yet another flash PMI (recently better) and the CPI, which is likely to be negative again despite the BoJ’s apparent calm last week. This is unlikely to help to explain the current fashion for bullishness on Japan. For those wondering if the global economy is turning a corner, this week will not be much help! However, politics could be turning several corners as Hollande goes bellicose, Putin comes in from the cold and fingers start to point at ISIS’s connections with Saudi Arabia. Domestically, Jeremy Corby looks more fed up than ever as his parliamentary collegues circumvent him and his minders on the Left rush to get control of the rest of the party. https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
3/8
11/23/2015
Zoho Mail Print
Chart 3 US Industrial Production: sagging but FOMC not worried
Source: Zerohedge
FOMC: It’s December after all! The minutes from the last meeting at the end of October together with a barrage of speeches from across the whole spectrum of hawks and doves have made it almost certain that the FOMC will hike in December. It has been a long road for Dr Yellen to get to this point and it still not clear why she and her most loyal supporters are so eager. Do they think consumers are willing and able to carry the economy at a time when fiscal policy is likely to stay tight and so many corporations seem more interested in share buybacks than in investing? Does Industrial Production (see Chart 3) no longer matter? Why is the detail of inflation data more important than the persistently low headline number while the opposite seems to apply to the Labor Market? Perhaps it is about the reputation of the Fed as stern guardian of the proverbial punchbowl or Dr Yellen’s famous desire for consensus. Apart from serial dissenter Jeremy Lacker, who stands down at the end of the year, there is probably now a unanimity for one hike next month and an indefinite pause thereafter: the socalled ‘dovish hike’. One thing that the Committee are clearly not concerned about, despite its ambiguous wording in September, is the effect of a US rate hike elsewhere in the world. Chart 4 suggests it should be as the US companies are more dependent than ever on foreign revenues. Chart 4: Not FOMC’s problem: Emerging Market companies’ too much debt not enough profit
https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
4/8
11/23/2015
Zoho Mail Print
Source FT
Eurozone: uneasy easing The Paris attack was meant to harm the EZ economy and indeed the weekend shutdown in Brussels, albeit intended to facilitate the operations of the security forces, shows how disruptive terrorism could become. However, it has also given the French government the pretext for what it was going to do anyway and sweep aside the strictures of the Stability and Growth Pact on annual deficits and debt ceilings. Others will surely follow and even the Germans may welcome some flexibility in funding the much larger migration challenge. This means that both fiscal and monetary easing will be occurring simultaneously as the ECB is clearly cranking up for major new initiatives. Bundesbank President Jens Weidmann is surely right that lower fuel prices are good for economic growth but Mr Draghi is deliberately ignoring him by stressing how low headline CPI is (0.1% in October year on year), which is the exact opposite stance of the FOMC who say inflation excluding fuel is what matters. While it is understandable that the double easing is exciting yieldstarved investors it is far from clear where it will all end. Fiscal easing will increase GDP growth if EZ governments spend it on security and defence but it will also increase debt. Thanks to Mr Draghi’s magic, sovereign bond yields have been tumbling again, some ever deeper into negative territory, and it seems many investors are buying with the intention of selling them on to ‘greater fools’. As long as the ECB keeps buying there is a backstop but this is unlikely to be permanent and more heavilyindebted governments may face a backlash if they take the brakes off completely. The other unknown is whether further monetary easing will work any better than before. Chart 5 suggests that much of the proceeds from the ECB’s purchases has stayed as bank deposits rather than being invested or spent. Of course, one person or company’s bank deposit could arise from anorther’s loan but last week I included a chart showing that EZ banks had ‘basically not used’ QE money to lend more. Equity markets clearly expect this new easing to work better but terrorism and the separate migration crisis are likely to inhibit spending, thereby offsetting at least some of any monetary stimulus. 4 :0 9 a .m. 2 1 No v 2 0 1 5 ·De ta ils
Chart 5 Where has all the ECB’s QE money gone?
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5/8
11/23/2015
Zoho Mail Print
UK Autumn Statement: tin hat time As he prepares to deliver the most important ‘budget’ of his second term, Mr Osborne could have done without October’s public finance numbers. At first sight Chart 6 does not look too ominous but the trend is not at all friendly and the full year outcome is likely to be closer to last year’s dark blue dot than the Office for Budget Responsibility’s previous forecast light blue square. The main problem is that after picking up after a slow start, tax revenues have failed to kick on thanks mainly to low inflation. Prices and pay have been held back thereby restricting the fiscal drag effect that boosts income and corporation tax and VAT receipts during periods of more typical levels of inflation. Relief may not be too far off, however, as although CPI was negative (just) in October for a second successive month it is set to rise quite sharply in the spring as the big fuel price cuts drop out of the calculations. It is ironic at the very time EZ countries are deciding on fiscal easing that Mr Osborne is due to announce a programme of tax increases and spending cuts. This time at least tax will not hit too hard as it is most likely to consist of fussy changes falling mainly on the better off to counter some of the criticism on reducing tax credits and welfare benefits. Muchpostponed increases in fuel duty could well inflict the biggest immediate pain while promised future giveaways are postponed. It may be that the Chancellor has miscalculated by boxing himself in with ambitious deficit targets but he must have expected to have to face up to some fundamental decisions. He seems to be forcing spending departments to engage in something similar to what used to be called ZeroBased Budgeting, whereby every item of expenditure has to be justified. Ultimately, electors will be presented with a choice between higher taxes and a smaller welfare state, including a more focussed NHS. Most politicians, including Mr Osborne himself until now, lack the courage to risk opprobrium and electoral defeat. Most commentators seem to believe and hope he has got this wrong but, if he has, the fundamental decisions will only have been postponed. Chart 6 Cumulative UK public sector borrowing
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6/8
11/23/2015
Zoho Mail Print
Source: Office of National Statistics
Markets in the Forecasting Season There has been an unusually early outbreak of 2016 forecasts in the last week and one has to question the motives of some of the forecasters. Longterm investors in US equity markets still have little to show for their efforts in 2015 and those in Emerging Markets are nursing losses. Dollar bulls in contrast have had a good year but will surely be up for more. Accordingly, it is not so surprising to read that some equity markets have fully priced in a FOMC hike in December while others mysteriously have not and the same goes for exchange rates. Last week’s price movements were the reverse (mirror image in some cases) of those in the previous week. Many trading strategies seem as transparent as ‘buying until prices stop going up and selling until they stop going down’. Corporate earnings currently seem to matter even less than usual (Chart 7). For those exposed to the FX market it is worth remembering that there are no oneway streets in major currencies and the minor ones can whipsaw. The dollar may look attractive but progress towards parity with the euro will not be smooth and may not happen at all. Nor is Cable a sitting duck as the FOMC will be in no hurry to raise rates again soon and the MPC would clearly like to make its own token first hike before long. Equity investors may be safer believing in Santa than not but should be wary of those who claim to have seen him coming. They may be sellers! https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
7/8
11/23/2015
Zoho Mail Print
Chart 7 Keep calm and carry on……er……buying?
This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient or employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication and its attachments is strictly prohibited. If you have received this communication in error, please notify us by telephoning on +44 (0)20 7 776 6550. When addressed to our clients any opinions or advice contained in this email are subject to the terms and conditions expressed in the governing Daniel Stewart & Company Plc engagement letter. Daniel Stewart & Company Plc. is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. You should carry out your own virus check before opening any attachment.We accept no liability for any loss or damage which may be caused by software viruses or interception/interruption of this email. Daniel Stewart & Company plc is a limited company registered in England No. 2354159; Daniel Stewart Securities plc is a limited company registered in England No.03899545; Daniel Stewart 1742 LLP is a limited liability partnership registered in England No.OC342060; Daniel Stewart Leasing Ltd is registered in England No.05422414. The registered office for each of these companies is: 33 Creechurch Lane, London EC2A 5EB.
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8/8
Zoho Mail Print
Print | Close window From
:
Alastair Winter
Subject
:
Economic Insights
Date
:
Sun, 22 Nov 2015 21:32:11 +0000
Alastair Winter is Daniel Stewart’s Chief Economist. His weekly comprehensive ‘Economic Insights’ publication, uniquely covers global market sentiment, politics and macroeconomics. Unsubscribe from this email
Follow Economic Insights on Twitter @AlastairWinter 'Incrementum inveniendum est'
Week ahead Sunday November 22nd 2015 Headlines Draghi the conjuror Data coming up: a lot of sound but little fury, signifying not much FOMC: hike and be damned Eurozone the Big Easy Osborne: getting harder Markets forecast alert
Chart 1 European equities vs Tradeweighted euro: magic or inverse correlation?
https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
1/8
11/23/2015
Zoho Mail Print
Source: FT
Magical Mario flexes his wand How Eurozone politicians must envy Mario Draghi! He can give the finger to the Bundesbank while exercising the power of life and death over weaker member countries. Even stronger countries can only manage passive resistance to him by ducking the structural reforms, which ironically are the better parts of his repertoire. Best of all he is not accountable to anyone, especially fickle voters. Last week he was in full conjuring mode and how the markets loved it. Chart 1 shows that historically European equities and the euro have a high negative correlation so the trick is to keep investors selling the euro while he protests this is not his aim. He also managed a further drop in sovereign bond yields as lower official rates now seem within his grasp. More powerful QE legerdemain also seems up his sleeve and equities just cannot wait. All he needs to do is link up with Santa Claus in the US and fund managers could end what has been hitherto a tricky year in truly festive spirits. There is, however, a party pooper in that many EZ banks are still not so keen to lend and businesses and households to borrow for investment or consumption. Mr Draghi may well believe in the Confidence Fairy but she is still playing hard to get. Chart 2 Eurozone investment: magic resistant since 2008
https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
2/8
11/23/2015
Zoho Mail Print
Data this week: plentiful but unenlightening Here in the UK, we face walltowall sneering at Chancellor Osborne as he makes his Autumn Statement on Wednesday. Both the job and the man make this inevitable and the latest data public finances certainly means he has some explaining to do. On Friday the second cut of Q3 GDP will provide much more detail on its component parts but overall is unlikely to be far away from the +0.5% (quarter on quarter) in the first cut. Mr Osborne will have been given a preview and Business Investment may well disappoint him as much as tax revenues. The US also reports the second cut of Q3 GDP and recent form suggests there may be substantial revisions, probably to higher than the first cut of +1.5% (annualised). All depends on Consumption and this week also brings the October numbers for Personal Incomes, Personal Spending and the PCE Price Index, which is the Fed’s preferred inflation measure. Only a really dramatic plunge in the data is, however, likely to deter the FOMC from hiking next month. Also due from the apparently less important business sector are Purchasing Managers (PMI) flash reports and the volatile Durable Goods Orders. Much more attention will be given to the Black Friday shopping festival that follows the more traditional Thanksgiving. An unexpected ‘closed door’ FOMC meeting has been called for tomorrow, perhaps to authorise interventions in both the FX and money markets related to the impending rate hike. Flash PMIs are also due from the Eurozone together with various other business and consumer surveys, all of which will have been conducted before the carnage in Paris. German business was already quite glum but there were hopes for France and Italy. Optimistic talk of recovery in Italy may have to be toned down unless Retail Sales and Average Wages have perked up all of a sudden. From Japan comes yet another flash PMI (recently better) and the CPI, which is likely to be negative again despite the BoJ’s apparent calm last week. This is unlikely to help to explain the current fashion for bullishness on Japan. For those wondering if the global economy is turning a corner, this week will not be much help! However, politics could be turning several corners as Hollande goes bellicose, Putin comes in from the cold and fingers start to point at ISIS’s connections with Saudi Arabia. Domestically, Jeremy Corby looks more fed up than ever as his parliamentary collegues circumvent him and his minders on the Left rush to get control of the rest of the party. https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
3/8
11/23/2015
Zoho Mail Print
Chart 3 US Industrial Production: sagging but FOMC not worried
Source: Zerohedge
FOMC: It’s December after all! The minutes from the last meeting at the end of October together with a barrage of speeches from across the whole spectrum of hawks and doves have made it almost certain that the FOMC will hike in December. It has been a long road for Dr Yellen to get to this point and it still not clear why she and her most loyal supporters are so eager. Do they think consumers are willing and able to carry the economy at a time when fiscal policy is likely to stay tight and so many corporations seem more interested in share buybacks than in investing? Does Industrial Production (see Chart 3) no longer matter? Why is the detail of inflation data more important than the persistently low headline number while the opposite seems to apply to the Labor Market? Perhaps it is about the reputation of the Fed as stern guardian of the proverbial punchbowl or Dr Yellen’s famous desire for consensus. Apart from serial dissenter Jeremy Lacker, who stands down at the end of the year, there is probably now a unanimity for one hike next month and an indefinite pause thereafter: the socalled ‘dovish hike’. One thing that the Committee are clearly not concerned about, despite its ambiguous wording in September, is the effect of a US rate hike elsewhere in the world. Chart 4 suggests it should be as the US companies are more dependent than ever on foreign revenues. Chart 4: Not FOMC’s problem: Emerging Market companies’ too much debt not enough profit
https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
4/8
11/23/2015
Zoho Mail Print
Source FT
Eurozone: uneasy easing The Paris attack was meant to harm the EZ economy and indeed the weekend shutdown in Brussels, albeit intended to facilitate the operations of the security forces, shows how disruptive terrorism could become. However, it has also given the French government the pretext for what it was going to do anyway and sweep aside the strictures of the Stability and Growth Pact on annual deficits and debt ceilings. Others will surely follow and even the Germans may welcome some flexibility in funding the much larger migration challenge. This means that both fiscal and monetary easing will be occurring simultaneously as the ECB is clearly cranking up for major new initiatives. Bundesbank President Jens Weidmann is surely right that lower fuel prices are good for economic growth but Mr Draghi is deliberately ignoring him by stressing how low headline CPI is (0.1% in October year on year), which is the exact opposite stance of the FOMC who say inflation excluding fuel is what matters. While it is understandable that the double easing is exciting yieldstarved investors it is far from clear where it will all end. Fiscal easing will increase GDP growth if EZ governments spend it on security and defence but it will also increase debt. Thanks to Mr Draghi’s magic, sovereign bond yields have been tumbling again, some ever deeper into negative territory, and it seems many investors are buying with the intention of selling them on to ‘greater fools’. As long as the ECB keeps buying there is a backstop but this is unlikely to be permanent and more heavilyindebted governments may face a backlash if they take the brakes off completely. The other unknown is whether further monetary easing will work any better than before. Chart 5 suggests that much of the proceeds from the ECB’s purchases has stayed as bank deposits rather than being invested or spent. Of course, one person or company’s bank deposit could arise from anorther’s loan but last week I included a chart showing that EZ banks had ‘basically not used’ QE money to lend more. Equity markets clearly expect this new easing to work better but terrorism and the separate migration crisis are likely to inhibit spending, thereby offsetting at least some of any monetary stimulus. 4 :0 9 a .m. 2 1 No v 2 0 1 5 ·De ta ils
Chart 5 Where has all the ECB’s QE money gone?
https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
5/8
11/23/2015
Zoho Mail Print
UK Autumn Statement: tin hat time As he prepares to deliver the most important ‘budget’ of his second term, Mr Osborne could have done without October’s public finance numbers. At first sight Chart 6 does not look too ominous but the trend is not at all friendly and the full year outcome is likely to be closer to last year’s dark blue dot than the Office for Budget Responsibility’s previous forecast light blue square. The main problem is that after picking up after a slow start, tax revenues have failed to kick on thanks mainly to low inflation. Prices and pay have been held back thereby restricting the fiscal drag effect that boosts income and corporation tax and VAT receipts during periods of more typical levels of inflation. Relief may not be too far off, however, as although CPI was negative (just) in October for a second successive month it is set to rise quite sharply in the spring as the big fuel price cuts drop out of the calculations. It is ironic at the very time EZ countries are deciding on fiscal easing that Mr Osborne is due to announce a programme of tax increases and spending cuts. This time at least tax will not hit too hard as it is most likely to consist of fussy changes falling mainly on the better off to counter some of the criticism on reducing tax credits and welfare benefits. Muchpostponed increases in fuel duty could well inflict the biggest immediate pain while promised future giveaways are postponed. It may be that the Chancellor has miscalculated by boxing himself in with ambitious deficit targets but he must have expected to have to face up to some fundamental decisions. He seems to be forcing spending departments to engage in something similar to what used to be called ZeroBased Budgeting, whereby every item of expenditure has to be justified. Ultimately, electors will be presented with a choice between higher taxes and a smaller welfare state, including a more focussed NHS. Most politicians, including Mr Osborne himself until now, lack the courage to risk opprobrium and electoral defeat. Most commentators seem to believe and hope he has got this wrong but, if he has, the fundamental decisions will only have been postponed. Chart 6 Cumulative UK public sector borrowing
https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
6/8
11/23/2015
Zoho Mail Print
Source: Office of National Statistics
Markets in the Forecasting Season There has been an unusually early outbreak of 2016 forecasts in the last week and one has to question the motives of some of the forecasters. Longterm investors in US equity markets still have little to show for their efforts in 2015 and those in Emerging Markets are nursing losses. Dollar bulls in contrast have had a good year but will surely be up for more. Accordingly, it is not so surprising to read that some equity markets have fully priced in a FOMC hike in December while others mysteriously have not and the same goes for exchange rates. Last week’s price movements were the reverse (mirror image in some cases) of those in the previous week. Many trading strategies seem as transparent as ‘buying until prices stop going up and selling until they stop going down’. Corporate earnings currently seem to matter even less than usual (Chart 7). For those exposed to the FX market it is worth remembering that there are no oneway streets in major currencies and the minor ones can whipsaw. The dollar may look attractive but progress towards parity with the euro will not be smooth and may not happen at all. Nor is Cable a sitting duck as the FOMC will be in no hurry to raise rates again soon and the MPC would clearly like to make its own token first hike before long. Equity investors may be safer believing in Santa than not but should be wary of those who claim to have seen him coming. They may be sellers! https://mail.zoho.com/mail/print.do?&m=2843005000006732001&iss=0
7/8
11/23/2015
Zoho Mail Print
Chart 7 Keep calm and carry on……er……buying?
This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient or employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication and its attachments is strictly prohibited. If you have received this communication in error, please notify us by telephoning on +44 (0)20 7 776 6550. When addressed to our clients any opinions or advice contained in this email are subject to the terms and conditions expressed in the governing Daniel Stewart & Company Plc engagement letter. Daniel Stewart & Company Plc. is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. You should carry out your own virus check before opening any attachment.We accept no liability for any loss or damage which may be caused by software viruses or interception/interruption of this email. Daniel Stewart & Company plc is a limited company registered in England No. 2354159; Daniel Stewart Securities plc is a limited company registered in England No.03899545; Daniel Stewart 1742 LLP is a limited liability partnership registered in England No.OC342060; Daniel Stewart Leasing Ltd is registered in England No.05422414. The registered office for each of these companies is: 33 Creechurch Lane, London EC2A 5EB.
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8/8
