This Monday is the first time in years that Europe doesn’t dominate the headlines. We knew for over a month that Japan was holding the election and that the LDP, which failed the country so badly in its decades in power, would almost certainly win a landslide. And a landslide it was. But the surprise is the extent to which the yen has responded. Some analysts had expected 84, but not slicing through 84 like butter. The implication is that the market has confidence in the upcoming Abe policies. This is a little hard to swallow, since the same policies have not worked so far.
Make no mistake—Abe’s policy goal is to restore Japan to mightiness, industrial and otherwise, and a key component of that ambition is a weaker yen. Attention in the “currency wars” will turn from the US, where the dollar is an afterthought in policy-making, to Japan, where it will be, again, central. We should probably start thinking about intervention again.
Japanese stimulus efforts in the past—rates near zero, QE, paving-over-rivers spending, cash vouchers for everyone, bank bailouts—all failed. Japan ended up, 30 years after the bubble burst, with debt to the eyeballs and the same demographic timebomb. We stopped following Japan very closely except for the key factors because broad outlines sufficed. Bernanke had said Japan’s experience was not the failure of Keynesian policies, it was the failure of insufficient Keynesian policies. Japan now gets another chance to place one giant bet on the same policies. We have written many times that the US is not Japan—for one thing, the US has the space, literally, to be more materialistic and acquisitive, plus net population growth both domestic and from immigration. But in the end, the new Japanese experiment will be judged as applicable to every country in the same situation. Be afraid. Be very afraid.
But risk appetite may get a boost from the US, assuming Congress and the White House can get their act together. If it’s true that Boehner put the debt ceiling on the table, the President should lay down his four aces and let us all go home for Christmas.
Japan and the fiscal cliff will dominate sentiment this week but the calendar is not empty. Today we get the Treasury report on capital flows (YICS). Tomorrow it’s the NAHG housing index and the Q3 current account balance. Wednesday we get Nov housing starts and MBA mortgage applications, with foreign news featuring IFO.
Thursday it’s the usual jobless claims, the Philly Fed, existing home sales, the FHFA Oct housing price index, and two biggies, the final Q3 GDP and final Q3 corporate profits. Also Thursday is eurozone consumer confidence, hmm. Thursday will be chock-full of market-moving material but Friday is even bigger, with the final University of Michigan consumer sentiment survey for Dec, the Chicago Fed, personal income and spending, and as Wall Street guru Sandi reminds us, quadruple options expiration and S&P & NASDAQ rebalancing.
After all that, Sunday is the Japanese Emperor’s birthday and next Monday, US markets close early for Christmas on Tuesday. We can’t set our holiday calendar for next week just yet since we feel obligated to follow the fiscal cliff and also Japan, which will slow down but not stop for the Western holiday.
The likely action in the FX market today is wobbling and jittering as everyone tries to figure out whether to double down on short dollar positions (if fiscal cliff gets fixed) and the confusion that ensues from being long the dollar against the yen while short the dollar against other currencies. As usual when the market is dazed and confused, the crosses will get the attention.
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 will be established by year-end as planned, with the target banks now defined, but the EC communiqué of Dec 14 removes mention of a eurozone reform budget and economic reform contracts, putting them off to the June summit.
- Greece will get Bailout Two of €34.3 billion during the week of Dec 17. PM Samaras says this gives the opportunity to end the crisis and “Grexit is dead.” Stay tuned.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|
|USD/JPY||83.68||LONG USD||WEAK||10 /17/12||78.71||5.94%|
|EURO/JPY||110.07||LONG EURO||STRONG||11 /21/12||105.38||4.45%|