Ukraine and bad economic data combined are not pushing the euro down

Outlook

The calendar is light today, chiefly the usual Thursday weekly jobless claims. Af-ter the good JOLTS report, the claims report may not have much bite. In fact, the JOLTS report is about the only good thing to come along in a while and may be offset by discouraging hous-ing market and retail sales data. We hear estimates of US GDP all over the lot, from 2% to 4.5%, for the year. The uncertainty over the number and the trajectory is the worry. Some economists wonder if the US can carry the weight of the whole world on its back—in other words, if the US is the only country with decent growth in the developed world while everyone else is sinking into the slough of de-spond, how can the US keep it up? The answer may be that the US is actually still quite isolated from the rest-of-the-world in terms of reliance on trade—although not in terms of reliance on capital inflows.

Come to think of it, data everywhere is pretty bad. We don’t know how to evaluate Chinese data, but if the oil guys are speaking of reduced inventory builds, the implication is that growth is not really all that robust, official 7.5% or not. The drop in Japanese GDP yesterday and core machinery orders today is pretty awful, too, and while the European GDP numbers may not be a surprise, they are not good.

Bloomberg, writing about how Asian equities were higher overnight, quotes an Australian CIO: “Even though the Fed is changing the way they talk about rates, we are still far away from seeing higher inter-est rates,” said Donald Williams, Sydney-based chief investment officer at Platypus Asset Management Ltd., which oversees about $1.5 billion. “As long as rates stay low, which could be still a couple of years, equities will remain well bid.” A couple of years? Wow. Meanwhile, after China reported a sharp contraction in credit, sentiment is rising that action will soon follow, probably a drop in bank reserve requirements.

Probably the big Event yesterday that is still reverberating today is BoE chief Carney’s comment that “In light of the heightened uncertainty about the current degree of slack, the [Monetary Policy] Commit-tee will be placing particular importance on the prospective paths for wages and unit labour costs.” This is in the context of UK wages falling for the first time since 2009, and the BoE cutting its forecast for wage growth in half from 2.5% to 1.25%. We can’t say the US is facing exactly the same situation, but US conditions are in the same ballpark. There’s not really much point in talking about consumer infla-tion if the consumer is not getting the wage/income increases to fuel inflation. Therefore, analysts are probably correct in detecting a shift in the UK and US central bank narrative. Even after tapering ends, expectations of the First Rate Hike in either country must be pushed out another six months or more. So the Platypus guy is right—equities will remain well bid.

As for the dollar, we note above that it’s amazing that Ukraine and bad economic data combined are not pushing the euro down. Probably the best explanation is that these developments are as expected and it takes a surprise to trigger a breakout move—everyone is already short in anticipation of exactly the out-comes we are seeing. As noted before, though, an oversold condition makes the euro susceptible to a perverse upward correction if something happens to start off a cascade of stops, including a big move by some wise-guy starting a short-squeeze. For sterling, expectations were too high of any early hike and when traders start gunning for sterling, get out of the way. It can become oversold and stay there for longer than anything else (except the yen for the opposite position, overbought).