In addition to retail sales this morning, the US calendar includes the usual Thursday unemployment claims, probably little changed. We get PPI, expected down 0.5% (on lower gasoline prices), with the core up 0.2%. We also get business inventories for Oct.
CPI is announced tomorrow. This will be our first chance to evaluate the unemployment/inflation threshold idea of the Fed. Basically the Fed wants everyone to understand, including and maybe especially the retail trader and speculators, that inflation isn’t what we think it is. Forget what you pay at the supermarket for food and at the pump for gasoline—inflation is something not-real that pointy-headed economists in Washington devise out of millions of columns of spreadsheet numbers. The public is already angry as hell about the government’s indifference to the effect of price inflation on their lives; they see focus on core inflation concepts as a way to cheat them. The public is not wrong, either. The Fed doesn’t care if some kid has to give up soccer because parents cannot afford to drive him to meets. Nor, maybe, should the Fed care. But in a system that has nurtured vast income inequality over the past three decades, it is heartless. It’s not the Fed’s job to have a heart, of course. The Fed is focusing attention on financial market players. That’s who it wants to communicate with.
It’s not clear the markets are listening, at least not the way the Fed would prefer. It’s going to take some time to get used to the threshold idea. Our immediate reaction is that it’s the worst idea we ever heard, but at the same time, Bernanke and his legions of economists are very smart guys and they must have thought through the ramifications. As a practical matter, maybe it’s not such a bad thing to teach the public and the markets about inflation. For one thing, people should save more against temporary inflation events. We always joke that it’s not Americans who are money-obsessed, as often charged. If they were, they would save more. By this measure, it’s the Germans, with their tremendously high savings rate (and obsession with inflation) who are money- obsessed.
In the end, the QE part of the Fed story is dollar-negative because it’s continuation of the same accommodation that makes the world safe for risk. But it may become a dollar-positive because the Fed is now likely to hike rates sooner than we had thought before yesterday. For example, if labor market participation continues to drop, we could reach 6.5% unemployment in less than a year. Rates could be expected on the upswing as early as next summer. You have to wonder if the Fed sees this—well, of course they do! This is, in part, probably part of the exit plan that BoE Gov King warned about. We are unwilling to consider that the QE part of yesterday’s Fed announcement is the same old dollar-negative and that’s the end of it. Other machinery is being put in motion. That doesn’t mean the dollar is now on an upswing, just that the terms of trade have changed permanently. We still like the euro aiming for higher highs, at least for the time being. But watch out. Eurozone Sanity Check: European Commission Pres Barroso proposed at end-November a process that could last as long as 5 years to create a true Treasury in the eurozone with taxing and borrowing authority. It is proposals like this that keep the magic in the euro, despite the eurozone economy diverging from the US and sliding into recession.
The EMU sanity check:
- The eurozone is officially in recession, with Q3 GDP down 0.1% after -0.2% in Q2. The IMF predicts a 80% probability of eurozone recession in 2013. The European Commission say 2012 growth will be 0.4% and cut its eurozone growth forecast to 0.1% in 2013 from 1% in May. German growth was cut in half to 0.8% from 1.7%. France will contract by 1.4%. The OECD forecasts 2014 as a second full year of recession. On Dec 6, ECB chief Draghi said growth will be 0.3% in 2013 at best and -0.9% at worst.
- S&P cut Spain's rating two notches to triple-B-minus, one step over junk; Moody’s cut France’s rating by one notch to Aa1, leaving Finland as the only eurozone country with a Triple A rating. The Economist Magazine names France the ‘time-bomb at the heart of Europe” on labor market rigidity and loss of competitiveness.
- The EU banking supervisor may not be established by year-end as planned.
- Greece still needs Bailout Two, now settled (11/27/12) but yet to be disbursed and disbursement dependent on each member government agreeing and a debt buyback.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|
|USD/JPY||83.41||LONG USD||WEAK||10 /17/12||78.71||5.63%|
|EURO/JPY||108.85||LONG EURO||STRONG||11 /21/12||105.38||3.29%|