Gearing up for a really scary week

Outlook:

Is it possible that Western countries can catch the Japanese disease—seemingly permanent deflation and endless QE? We have argued for decades that Japanese demographics make all the difference—not only an ageing population and population growth below replacement levels, but also the absence of immigrants. This time we have the perfect example of secular stagnation, unemployment at only 3.1%, the lowest in 20 years, together with household spending down 2.4%. These two do not go together. Helicopter money, as PM Abe is planning, didn’t work last time, so why would it work this time?

We may get some small evidence of stagnation in the US when we get retail sales from this weekend, starting with Black Friday today and lasting until the close on Monday. The National Retail Federation forecasts 135.8 million shoppers, whether in stores or online, but sales continuing to decline for a third year. Last year the 4-day sales fell 11% from the year before to $50.9 billion. Perpetual “sales” may be partly at fault.

Everyone is gearing up for a really scary week next week—the ECB decision, plus speculation about whether the Swiss National Bank will follow. Hot on the heels of the ECB comes the US payrolls report. On Monday we will get the IMF decision on including China is the SDR basket, with a lack of clarity on exactly how the IMF staffers are going to weight exports, official reserves and use of the yuan as a numeraire. The current members of the basket can all point to widespread use of their currency in trade and other measures—the US, UK, Japan and eurozone. China has been aggressively seeking to expand use of the yuan but without success on the numeraire front, mostly businesses does not trust the free-market embrace and expect further manipulation (i.e., devaluation).

The overriding question from now on is whether the ECB rate cuts are priced in (“cuts” a proxy for all three actions, raising the amount of assets, extending the deadline, and raising the discount, perhaps in two tiers). The parallel question is whether the Fed’s hike is fully priced in. The FT reports that some big bank analysts see it one way and other equally big analysts see it the other way. Goldman, for one, says “We expect euro/dollar to go to parity by year end and to $0.95 over the next 12 months.”

And yet many also expect a corrective bounce upward for the euro, and that’s in keeping with experience. The question is which of the horizontal gold old-high lines get broken. The real problem is that it takes deep pockets to withstand an upside euro correction to (say) 1.0830 from Nov 12—over 200 points. But get used to it—we are about to see two horrible developments—a widening of the average daily range and wide intraday swings. Hardly anyone makes a profit under these conditions. The big-picture macro trader makes a gain, Soros-style, but has to weather the corrections, which can become violent. Retail traders, beware.