US, UK, EU: Know your enemy?

More Neil Staines, 2 hours ago13 December 2011

“Know your enemy” – Rage Against The Machine

 

“Now I got no patience”

If there is one word that sums up the sentiment of yesterday’s markets it is disappointment.  The apathy that consumed trading throughout the day was akin to a disappointing acceptance from the ‘bulls’ that the reality of the EU summit announcements is that we are still a lot further away from a solution to the troubles than it was hoped we would be at this point.  The historic tendency for equity markets (and the EUR) to rally in the final month of the year has added to the frustration as stocks, EUR and broad risk assets slumped on the realisation that this year is definitely one to rely on historic correlations, or the norm!

 

“Still in a room without a view”

The reality of the situation in the eurozone is that there “is no silver bullet”, there is no immediate panacea.  The ECB have given what Christian Noyer described yesterday as a “bazooka” in terms of flooding the banking sector with long term liquidity and reducing collateral constraints, however, the uncertainty of the ultimate outcome of the eurozone continues to propagate further uncertainty – One of the reasons that the ECB saw the need to inject further liquidity into the banking sector is that banks are placing money on deposit at the ‘safety’ of the ECB’s facility to the tune of over EUR300 billion a day at the moment, this is a perfect example of the uncertainty of the ‘safety’ of interbank counterparts leading to a reduction in liquidity for the system as a whole.  Full monetization of eurozone debt by the ECB is potentially the only real short term action that could cause an about turn in the markets (perhaps along with a full guarantee of eurozone debt from Germany) however legally and politically this is proving a step to far at the current juncture.

 

“All of which are American dreams”

I discussed briefly yesterday the recent, significant outperformance of the US macro economic backdrop over last few weeks, which has delivered consumer, sentiment and manufacturing data that are likely to see a Q4 GDP print significantly above expectations as recently as a couple of weeks ago.  Today we may well get further confirmation of this as small business optimism, retail sales, inventories and a jobs measure pave the way for this evenings US monetary policy meeting (FOMC).

 

“Mind of a revolutionary”?

As usual on the day of the FOMC, Fed Chairman Bernanke will be the core focus of the proceedings in the build up to the ‘forensic lexicography’ of the statement.  Today’s statement however will perhaps be looked at with a subtly but significantly different bias.

 

December began with a bang in the US as adjustments to the size of the US labour force gave rise to a sharp fall in the Unemployment Rate.  Whilst the level of unemployment is still unpalatable for Congress and the Fed, if we add the recent economic momentum to the improved pace of reduction of the unemployment rate (providing that it can be maintained – or at least validated in next months data) then the prospects for Fed policy start to become more two-way.  

 

“compromise, conformity,… “

I am not suggesting that the Fed start to tighten policy any time soon, but the acknowledgement of the improved (even subtly improving) macro economic backdrop, however tentative, may start to put a slightly different perspective on the analysis of Fed policy.  For me this is the transition between USD positive news being negative for the USD because the higher ‘beta’ currencies (or those currencies, or assets with a higher correlation to ‘risk’) take greater impetus from the ‘risk positive’ stimuli than the USD, to a point where good US data will ultimately begin to be positive for the USD.

 

At the current juncture the impact of this is likely to be subtle but as we move into 2012, the implications for currencies such as JPY (particularly if there is a ‘plan’ in the eurozone) are very significant.  For today the focus may be on the ‘enemies’ of individual nations and their response to the threats they pose, however the dislocation and disruption of the eurozone crisis and the turbulence of the crises before that have provided a platform for significant opportunity going forward.  On of the UK’s biggest enemies of late has been that of Inflation.  This mornings data show that the pressure is starting to come down, but with prices still rising at an annual rate of 4.8% it may be a while before inflation falls to a level that is more supportive of consumption and demand growth.

Tags: EURUSD, GBPUSD, EURGBP, macro, Gross Domestic Product, Monthly Retail Sales, Unemployment Rate 117 Views 0 Like! 0 Comments 0 Follow In order to like something, you need to be a member.
Click here to join. It's free!
Click here to log in to your existing profile.In order to follow something, you need to be a member.
Click here to join. It's free!
Click here to log in to your existing profile