For the next few days I will be resting, hoping to enjoy some peace before the potential storms that face the financial markets at the end of 2014. Now that the Japanese election has been decided there is certain to be great volatility in all Japanese investments as polls get released and money becomes nervous. It seems that Prime Minister Abe is trying to solidify his hold on the LDP by going directly to the people. In an effort to gain the voters support Abe has decided to delay the scheduled sales tax increase and also announced a corporate tax cut. The game for Abe is to get public support to overcome the fiscal hawks that the prime minister believes are stalling the economy and preventing the completion of Abenomics and the “three arrow agenda.” The stalwarts of the LDP will be defeated by an overwhelming ABE victory.
The Bank of England’s chief-economist had the line of the month in his response to the disinflationary forces confronting Europe and the U.K. It seems that the G-20 did yield much more discussion about Europe’s economic malaise than was revealed in the communique. BOE Governor Mark Carney was warning of stagnant Europe being a drag on the global economy and impacting British growth. Even the economically challenged British Prime Minister David Cameron warned of flashing “red lights” on his economic dashboard. The last inflation data from the BOE revealed that inflation has fallen below its target and the lack of growth in its largest trading partner, the EU, threaten to push inflation lower than previously expected.
The gathering in Brisbane, Australia provided a backdrop for the world’s leaders to reveal their warm and fuzzy sides to the cameras as koalas were distributed for “hugs for the home folk”–see we really care about nature and the environment. As usual, the G-20 meeting ended with the release of a leaders’ communique, which provides areas of future “cooperation” for the global hegemons. The typical areas of concern about the environment and the diminution of fossil fuels are stated, as are areas of concern about the international tax system and globalized funding of terrorism and money laundering.
It is not often that investors are treated to the wisdom of U.S. Treasury Secretary Jack Lew. I am sure that Mr. Lew is a fine man but he is an example of a political appointment serving in a role beyond his pay grade. If I had a question about my 1040-EZ form I would search him out but on global economics and politics I would hope he wouldn’t answer the phone at 3 a.m. In an well-staged leak of his prepared words to be delivered in Brisbane, Australia at the G-20 conclave this weekend, Secretary Lew warns Europe that it risks suffering a lost decade similar to Japan if it fails to undertake fiscal policies to stimulate growth. In a Financial Times article by Robin Harding, Secretary Lew is quoted at the World Affairs Council in Seattle as saying: “Resolute action by national authorities and other European bodies is needed to reduce the risk that the region could fall into a deeper slump. The world cannot afford a European lost decade.” Mr. Lew suggests the usual actions of monetary, fiscal and structural efforts to lift growth or what has become known as Abenomics three arrows.
A Reuters story today (“Kuroda Sprang Easing Surprise to Head Off Damaging Inflation Forecast”) suggested that the move by the BOJ was a rapid and expedient effort by Governor Kuroda to prevent the markets from believing that the previous Japanese actions to “ignite” inflation had been a failure. The BOJ had been trying to target 2 percent inflation but the recent fall in oil and energy prices was placing downward pressures on inflation, calling into question previous attempts by the Japanese authorities to raise inflation expectations.
In the recent blog post I opined that the nonfarm payrolls (NFP) would be above the long-hoped for 300,000. The actual number was a “tepid” 214,000. The market was certainly anticipating a large addition for why else would the DOLLAR selloff and the BONDS have such a sustained rally. The SPOOS and other equity markets closed unchanged on the day–stronger for the week–but the post-jobs report reflected that it will take strong economic data to push equities higher in a world without FED purchases and a confused ECB. The strongest part of the unemployment report was the fall in the U6 data, which fell 0.3% percentage points to 11.5%. Unfortunately for Chair Yellen wages gained a slight 0.1% indicating little upward pressure on pay.
During the last 30 months I have enjoyed listening to the Draghi press conferences as the ECB has been entertaining while he deftly handled the questions from a cadre of astute European financial journalists. Yesterday was certainly an exception as President Draghi showed none of his usual light banter and seemed unduly stressed by recent rumors of deep divisions in the boardroom of the ECB governing body. Reuters, the medium of the rumors of factionalization, was treated brusquely by Mr. Draghi when the reporter asked a question. The reporter wanted to know if the losses on any asset-backed securities (ABS) would be shared by the individual national banks or solely by the ECB. This was a very pertinent question because President Draghi insisted that the ECB was not becoming a “bad bank” by buying low quality assets from all the European domestic banks. The ECB president insisted that the ABS and other structured financial instruments in Europe were of much higher quality than the pools of subprime loans that almost collapsed the U.S. and global financial system.
Walking a tightrope suspended 40 stories above the ground without a safety net was a tremendous feat, but bringing the ECB to a genuine quantitative easing program will be nothing short of miraculous. In yesterday’s grist from the rumor mills, Reuters reported ECB President Draghi will meet intense resistance in his effort to “do whatever it takes” to secure the EURO currency and economic growth in Europe. It seems that at least 12 members of the ECB are angry that Mario Draghi promotes stimulus plans that the ECB governing group has not sanctioned. (I’m talking about the famous “no taboos” speech of July 2012, as well as his speech at Jackson Hole this summer where he promised to prevent the onset of deflation.) The problem for Draghi is that many of the world’s central banks are moving ahead with aggressive stimulus plans while the EU provides jawboning but little action.
The question for global macro: Why did the Japanese decide to become more aggressive on quantitative easing at this moment? The YEN had been stable for most of the year, trading between 101 and 106 YEN to the DOLLAR and between 135 and 140 on the EUR/YEN for the previous four months. The Japanese seem to exert pressure after international meetings. The IMF and G7 and G20 ended in mid-October so either the Japanese wanted to avoid criticism about depreciating its currency or it received the GREEN LIGHT from the G7 members to get more aggressive on its QE efforts. Readers of NOTES FROM UNDERGROUND can revisit a blog post from October 15, 2012 when I noted that the G7 communique seemed to give the Japanese authorities a “wink” in its efforts to weaken an overvalued YEN. Let’s examine some other possibilities for renewed efforts by the BOJ to weaken the YEN and, of course, lift equity prices in a simultaneous move: