Notes From Underground: Month-End, Quarter-End and Oh Yes, a New Fiscal Year in the U.S.

Tonight’s agenda brings an announcement from Australia as the RBA meets to decide its forward monetary policy. Interest rates are currently at 2.5% on the overnight cash rate (OCR). Consensus is for no change and I would agree with that for the Aussie dollar has been stable and the 2/10 yield curve is a healthy 135 basis points positive slope. Confusion reigns around the world as politics is causing uncertainty in much of the developed world’s economies. Expect the RBA Governor to note risks to global growth and that the Aussie bank will remain vigilant. Also, with a new government elected in early September the bank will want to see what types of fiscal policy will be enacted before embarking on a change in current monetary policy.

Following the RBA release will be the ABE press conference about the Japanese government’s decision on increasing the sales tax and other measures of fiscal policy. It was decided many months ago that the consumption tax would increase in April 2014 to 8 percent from its current rate of 5 percent. There are some voices in the present government who oppose the raising up the tax so as to not undermine the current economic growth in Japan. Last time Japan raised the sales tax it brought about the end of a fragile economic recovery and pushed Japan further into a deflationary cycle. If PM ABE goes ahead with the full tax increase some analysts expect that the tax impact will be offset by a robust stimulus package of corporate tax cuts, tax rebates for low-income families, public works programs and other measures meant to encourage investment.

The Japanese officials are reluctant not to raise the consumption tax for fear of a backlash from bond investors sending yields higher due to Japanese failure to act to curb its long-term deficit problems. Finance Minister Taro Aso and Economy Minister Akira Amari have been openly arguing about the size of the stimulus plan as the finance ministry wants the stimulus to be as small as possible so as not to upset the benefits of the tax hike on shrinking the budget. Aso wants a TWO TRILLION YEN STIMULUS WHILE AMARI FAVORS A FIVE TRILLION YEN PLAN, which equates to about two-thirds of the proposed tax levy.

A larger stimulus should be positive for the NIKKEI but the details will be very important. A smaller amount of spending will probably be deemed positive for the YEN but caution will be the word. Beware of algo headline readers driving volatility. The dilemma for PM ABE is best summed here: “By going through with the tax increase, he will signal to investors and the international community  that his government is serious about tackling Japan’s deficits and debt, but by returning most of the revenue to businesses and individuals he will show that his government is still focused on triggering sustainable growth.” (hat tip TSH). Abe’s decision will be Solomonic and truly attempting to split the baby.

***From Europe  we get conflicting news. First, Herr Johann Teyssen, the CEO of the German energy company EON, warned of the growing gap between Europe and the U.S. in energy efficiency. In a Financial Times article, Josh Chaffin reports that Teyssen said the “shale bonanza has made natural gas costs a quarter to a third of those in the EU.” The high cost of European energy is driving heavy industry across the Atlantic. EON is a biased observer as it has had to moth-ball gas-fired powered plants in order not to pay carbon taxes on fossil fuels. Gas plants previously received generous government subsidies but those now go to support expensive solar and wind power. While the views of Teyssen may be a lobbying effort to get the gas-fired plants turned back on, it is certainly an issue that investors into Europe have to be made aware.It is an ongoing discussion about Europe … pro or con?

Also, I am showing today’s 2/10 Portuguese yield curve as an illustration of the funding problems for Portugal’s sovereign debt. The 2/10 curve is flattening because  two-year yields are rising as investors have concerns about Portugal and its ability to stay the course on austerity. Yesterday, the local elections in Portugal were a resounding defeat for the PM Pedro Coelho’s  center-right party. The electorate is tired of the continued strain of budget austerity and gave the PSD a message of enough pain. The ECB, IMF and European Commission keep singing the praises of the Portuguese budget success but there seems to be a disconnect from the nation’s voters.

Portuguese 2/10 Yield Curve

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2 Responses to “Notes From Underground: Month-End, Quarter-End and Oh Yes, a New Fiscal Year in the U.S.”

  1. Chicken Says:

    Twice in modern times, Japan has accomplished selective change of significant magnitude. It’s perhaps an optimistic viewpoint they can repeat the feat given the current circumstances.

    Or, perhaps it doesn’t matter for our purposes……, I don’t know..

  2. yra Says:

    Chicken–too early to know what the outcome means for our purposes—but it does reflect that ABE has gotten very serious about sustaining the recent growth inspired policies—the world needs growth wherever it can find it and that does matter,especially as the Europeans keep pushing for more austerity

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