IMF predicts a 80% probability of eurozone recession in 2013

Outlook:

As far as we know, payrolls are still scheduled for release on Friday, with the consensus forecast at about 120,000 and unemployment about the same. Before then, China’s official PMI tomorrow should confirm the HSBC version and relieve anxiety about a hard landing. Next week is more important in the grand scheme of things, with the US presidential election on Tuesday and the Chinese government changeover on Thursday. The US has a stable system and China has a tightly managed one, so no one is expecting any fireworks. Even so, traders get jittery around big events like this.

The FX market is full of discontent these days. For one thing, most charts are really hard to read. If you are looking at 8 indicators, you get 4 that say buy and 4 that say sell. Then there are developments that ruin chart reading, like the dollar/yen spike yesterday. Since indicators are nothing more than arithmetic juggling of the basic bar components (open, high, low, close), spike highs and lows screw up the arithmetic. We need to know averages and norms and statistically usable outer limits and spikes ruin those.

For another thing, we have a lot of noise from other markets, especially equities but also commodities. The AUD is a good case in point. Commodities are down and the RBA is expected to cut next week, but the AUD is firm and has even surpassed the last intermediate high from Oct 25 (at 1.0400). Huh?

And that brings us to economic data and the institutional environment. The US seems to show some recovery chops but the eurozone has almost no bright spots among the data. Worse, the institutional status quo is uncertain to the point of deserving the label “unstable.” The only ties that bind come from Mr. Draghi’s resolve but Spain is not letting him do his job... and there’s an election in Catalonia soon. So what if the finance ministers agree to a 2-year extension of the Greek budget conditions? If the Greek parliament doesn’t approve the proposal or if it’s not actually implemented, no progress will have been made. The second of those two outcomes has a greater than 50% probability. Therefore, buying the euro because the eurozone finmins are talking is silly. We’d guess the euro’s current sideways move that has now last six weeks must come to an end at some point and the logical direction is downward, but that would be the sensible forecast and sensibility is not at work these days.

The EMU sanity check:

• The IMF predicts a 80% probability of eurozone recession in 2013.

• The WSJ estimates capital flight/deleveraging credit contraction by $2.8 trillion in assets by end-2013

• German thank-tank forecast EMU growth at -0.5% this year and +0.1% next year.

• S&P cut Spain's rating two notches to triple-B-minus, one step over junk, and Moody’s has the same rating (Baa3), also one notch over junk. Moody’s cut the ratings of half the Spanish regions. S&P cut the SocGen rating by one notch and issued a negative outlook for the other two big French banks on deteriorating conditions.

• The EU banking supervisor will be established by year-end but may not have the authority to recapitalize the Spanish banks for another 6-12 months.

• The EU Summit on Oct 18-19 failed to resolve the Greek bailout issue. The troika says Greece needs two more years plus an additional €30 billion in bailout money. The deadline (a bond redemption) is Nov 16. Can Grexit be far off?

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	79.78	LONG USD	STRONG	10 /17/12	78.46	1.34%
GBP/USD	1.6117	LONG GBP	STRONG	10 /18/12	1.6160	-0.30%
EURO/USD	1.3003	LONG EURO	STRONG	08/07/12	1.2403	4.84%
EURO/JPY	103.72	LONG EURO	WEAK	08/06/12	96.72	7.24%
EURO/GBP	0.8066	LONG EURO	WEAK	08/06/12	0.7943	1.55%
GBP/JPY	128.59	LONG GBP	WEAK	10 /18/12	128.04	0.43%
USD/CHF	0.9287	SHORT USD	WEAK	08/07/12	0.9686	4.30%
USD/CAD	0.9972	LONG USD	WEAK	10 /04/12	1.0229	1.11%
AUD/USD	1.0393	SHORT AUD	WEAK	10 /24/12	1.0328	-0.63%
AUD/JPY	82.92	LONG AUD	STRONG	10/17/12	81.19	2.13%
USD/MXN	13.0375	SHORT USD	NEW*WEAK	10/31/12	13.0375	0.00%