The 2 major data points during the week were
December CPI data for the EuroZone (EZ); and
US December non-farm payrolls.
EZ December CPI came in at -0.2% Y/Y, weaker than the decline of -0.1% Y/Y and below Novembers +0.3%. However, core inflation rose to +0.75%, up from +0.67% in November.
The data is yet another indicator which suggests that the ECB will announce a sovereign bond QE programme at its next meeting on the 22nd January. The size is expected to be E500bn and, most likely, will involve central banks of the countries in the EZ buying their own bonds up to their relative shareholding (which roughly equates to their respective GDP’s) in the ECB. Each central bank will be liable for their own credit risk, thereby avoiding German fears that the bond buying programme will pose a joint and several risk on all EZ countries.
Whilst the announcement is a near certainty, I have to say it is unlikely to work. The size, in any event, is too small and will, almost certainly, will need to be increased in due course. However, the QE programme will result in further weakness of the Euro. However, net Euro shorts are up from 152k to 161k contracts as at the 6th January, getting closer to the record net short position of 179k contracts last October, which could limit the Euro’s decline in the shorter term. Short positions on Sterling, C$, A$ against the US$ rose, though JPY shorts declined to 90k contracts, as opposed to 96k previously.
3 days later on the 25th January, the results of the Greek national elections will be announced. As it’s Greece, expect some twists and turns, but the market is remarkably complacent. Greece will not be kicked out of the Euro in the immediate future. The uncertainty will however weigh on the Euro further.
The US December non-farm payrolls data reported that 252k jobs were created in December, with job gains spread across most sectors. The unemployment rate declined to 5.6%, mainly due to a fall in the participation rate. A good number and the highest increase in employment since 1999. However, the fly in the ointment was the -0.2% decline in wages and November’s downward revision. Clearly disappointing and hard to explain, though the ECI data (which the FED looks at and, I suspect, is more reliable) suggests that wage growth continued to increase in Q3/Q4. Wage growth in the energy and related sectors are bound to have been negatively impacted by the oil price decline, but I continue to believe that wage growth will accelerate this year as the employment market tightens.
The market is panicking over deflation. Whilst inflation levels are and will remain low, the prospect of a Japanese style deflation is not on the cards. Indeed, lower inflation, due to a decline in commodity prices (energy, in particular) is a massive positive factor for consumer driven economies such as the US and UK. I remain convinced that oil prices (Brent) will decline to below US$50 (US$45?), though unlike markets, I see this as a huge positive. I remain bullish US and other developed equity markets, together with consumer driven emerging markets such as India. Having said that, there is a risk of higher inflation and a wider budget deficit in India, I must admit. Government reforms have been slower than expected – no great surprise – the new administration promised far too much and certainly will be unable to deliver this year.
S&P is likely to downgrade Russian debt to junk by the end of the month, with the Rouble weakening further. The continued decline of oil prices will not help either. A Rouble/Russian crisis looks as if its just a few months away.
My thoughts and prayers go out to those murdered in France by fundamentalists. The fear (very likely) is that countries will impose stricter laws as a result, which will limit personal freedom.
I am currently back in India and will be providing an update on the political, financial and economic situation.
Could have been a better newsletter without the burden of macroeconomic misconceptions; e.g.,
WRT ECB QE: “The size, in any event, is too small and will, almost certainly, will need to be increased in due course. However, the QE programme will result in further weakness of the Euro. …”
Yes, it will be too small and need to be increased assuming the political will exists to do so, but 180 degrees wrong on the implications; nothing would serve the Euro area better WRT trade balance, national accounts and improved employment than a cheaper …excuse me, “weaker,” Euro.
WRT inflation levels: “Whilst inflation levels are and will remain low, the prospect of a Japanese style deflation is not on the cards.”
Wrong, Japanese style deflation has already happened in Europe and the card deck is stacked w/ the first rounds played and southern Europe the biggest loser so the only question is how many hands are left and how well they will be played (if Japan’s last two decades and more recent European fiscal policy are any gauge they will be played poorly).
“limit personal freedom” of killing jews and cartoonists? Do you have less freedom since 911?
Many people would like to think that Europe is doomed, that Japan style deflation is already there, and the US is not far behind given the ineffectual government and weak economy. The problem with this analogy is: 1) Europe has a more open border policy than Japan and has significant immigration. 2) economy is more dynamic with capital flows in and out.
I think the better analogy is a US depression scenario similar to the 1930’s where a short-sighted tightening of fiscal and monetary policy caused greater pain and a longer stagnation period that is warranted. Eventually Europe will be fine precisely because its economy is more dynamic than Japan’s and it actually has immigration which tends to counteract the aging demographic pithole.
If Europe is doomed like Japan, why does the aggregate European equity fund (IEV) reflect that?
Japan was and is not “doomed” — it just didn’t grow economically in real or potential capacity terms — but demographics and greater capital control assured unemployment would not become a major problem to its citizens or a threat to its governance.
That is not the case in Europe as you point out and, under your logic (which I largely agree with), they cannot afford to dawdle and dither as Japan did without risking ever higher levels of unemployment and increasing threats to governance.
There is no fall in wages. In disinflation prices fall. Real wages accelerated slightly in 2014 over 2013 and that was due to the fall in inflation. People need to stop targeting nominal wages. Only real count(aka Ronald Reagan had strong nominal wages, but weak real due to struggling to rise above inflation).