Recap 2014-08-01: Update on EURUSD, Charts


A reader very kindly pointed out that my figures for BBoP yesterday were out of whack. (Thanks Vandals!) It appears I made the mistake of forgetting to adjust the GDP figures in the denominator to annual equivalents. As a result, the flow figures as a pct of GDP were 4x what they should’ve been. As the Current Account is quite a bit lower than initially noted, this lessens the size of the required adjustment. But at 2.5% of GDP, it is still near the highest level in history, and suggests eventual mean reversion. The other observations in yesterday’s note remain unaffected.

Some weekly chart observations:

The recent historical pattern for SPX has been pullbacks just past the 20 week moving average over the course of 3 to 6 weeks before stabilizing. If this pattern holds, it suggests a continuation of the sell off until late August or mid Sept, to levels from ~1900 to ~1850:

US yields do not look ready to break out yet:

2s30s retraced sharply from the lows this week, but in the larger picture appears to be simply recovering from an over extension to the downside. The falling trend does not look to be at risk, at least not yet.

Bund yields continue to call, breaking previous lows. My view on that is different from the typical technician interpretation, however, which is that broken support/resistance levels usually lead to further momentum. Bund yields actually have a history of breaking previous lows by a small amount before recovering. Given the macro back drop, I think this is another such instance – and I think the break to new lows has driven the capitulation of the final group of shorts.

The EUR chart does not look particularly inspiring in either direction. 1.35 has been a pivot level for a while, so the break to the downside last week may have emboldened bears. But at the same time, the cross has a history of fake breaks of that level, highlighted in the chart below. With the doji in the candle chart this week, I am wary that this may again be a head fake.

Finally, via tBP, look at this chart, and if you live in the US, count your blessings:


  • US Employment was ‘goldilocks.’ Not too hot, not too cold:
  1. Payrolls declined to 209k vs 230k exp and 288k prev, although that was revised up to 298k.
  2. Unemployment ticked up to 6.2% vs 6.1% exp and prev. But the participation rate ticked higher 62.9 vs 62.8 prev
  3. Hourly Earnings was stable at 2.0% YoY vs 2.2% exp Hous worked was stable as exp

Manufacturing PMIs:

  1. US ISM improved to 57.1 vs 56 exp and 55.3 prev
  2. EU PMI was revised down 0.1 to 51.8, as the negative German revision offset the positive French revision
  1. UK PMI declined to 55.4 vs 57.2 exp and 57.5 prev
  2. Italy PMI declined to 51.9 vs 52.5 exp and 52.6 prev

Australia PMI improved to 50.7 vs 48.9 prev

China PMI improved to 51.7, vs 51.4 exp and 51 prev. This was the highest level since April 2012. US Core PCE was stable at 1.5% vs 1.4% prev

The WSJ reports that a number of prominent credit funds are adding to bearish wagers:

  1. Mr. Lippmann, who at Deutsche Bank placed bets against crisis-era mortgages, is among those who think trouble spots may be forming. He started his own hedge fund, LibreMax Partners LP, in 2010 and is buying credit-default swaps on corporate debt, people familiar with the investments said.
  2. Mr. Birnbaum, who was grilled by Congress in 2010 for his subprime trades while at Goldman Sachs, has more than doubled his bets this year against junk bonds issued by low-rated U.S. companies, according to investor documents for his Tilden Park Capital Management LP hedge fund and people familiar with his thinking. His bearish positions total about $4 billion.
  3. Apollo Global Management APO -1.37% LLC, the $159 billion private-equity giant, also recently rolled out a fund to bet against junk debt
  4. Other hedge-fund firms currently building up bearish credit positions include Fir Tree Inc. and Carlyle Group LP’s Claren Road Asset Management LLC unit, according to people familiar with the firms

The Ebola outbreak could introduce some volatility if it spreads to DM population centers:


  • Mon: China Non-Mfg PMI, Australia Retail Sales, Turkey Inflation, EU PPI, AU Services PMI, Trade Balance
  • Tue: RBA, EU PMI, US ISM Non-Mfg, NZ Employment,
  • Wed: US Trade Balance, Australia Employment
  • Thu: BoE, ECB, Canada Building Permits, US Jobless Claims, Australia Home loans, Japan Eco Watchers
  • Fri: German Current Account, Canada Employment, US Unit Labor Costs, China CPI

Recap 2014-07-31: Equities, EURUSD


I read lots of different ‘explanations’ for the equity move today. I think the major driver is month end selling into a temporarily over extended market, as I detailed on July 10th. These types of corrections usually take several weeks to play out. In addition, seasonality is negative for most of next month, and more importantly, note that yields did not moved lower in response. I.e. – there was no easing of financial conditions in connection to this move. All this suggests that we may still be in the early stages of a moderate, but healthy correction.

Separately, I’ve been spending a lot of time thinking about the dollar over the past couple weeks. I think that the time for a major USD bull market is finally here – a bit earlier than I’d expected previously.

For around a year now, the consensus view has been for a stronger dollar, driven by higher US yields. Goldman published a piece on it today reiterating that. In contrast, I’ve been a bit less certain on the timing. For one, the correlation between yield differentials and currencies has always been unstable, and over the past couple years has been not much different from zero:

In particular, I thought that portfolio inflows into Europe was likely drive a persistent bid in the cross, a view that now seems more broadly accepted. However, I now think that may have been an incomplete explanation. A deeper dive into the EU flows data actually shows that portfolio flows have been only roughly average relative to the past decade:

In other words, the hypothesis that portfolio inflows have offset what would otherwise have been interest rate driven bearish flows out of Europe is not especially strongly supported by the data. What may be a more complete explanation is that the portfolio flows, in conjunction with an extremely high current account surplus, have been offsetting interest rate driven bearish flows out of the EUR. Note the massive the EU current account surplus below. At almost 10%, it is large not only relative to history, but also by most standards of what is a ‘sustainable’ current account balance. In fact – the current account surplus is almost twice as large as portfolio flows over the past couple years, which when combined helped push the Basic Balance of Payments for the EUR hit all time highs earlier this year:

The differentiation between the portfolio and current account components of the basic balance is crucial because not only are the drivers different, but the volatility different as well. In particular, we can say with a much higher degree of certainty that the current account balance is likely to be lower at some point in the future. In fact – and this is very tentative – we may have passed the peak earlier this year. Not only has momentum slowed, but the EU also pulled out of a recession a year ago. (Recall that usually, higher domestic growth causes a deterioration in the trade balance as imports increase) A continuation of EU growth thus could continue to pull the EU current account balance lower, although like all economic ‘rules,’ there are exceptions. On the topic of EU growth though – note that the EU Unemployment print today is the 5th consecutive positive surprise:

In aggregate, this suggests that interest rate differentials could once again become the primary driver for FX. This hypothesis is further supported by the fact that 2 year interest rate differentials, which has historically been more strongly correlated to FX than other points on the curve, has finally begun moving away from zero. Note that the correlation breakdown occurred whilst the 2y differential was at zero, and seems to be coming back now that the differential has moved away:

I’ve written in the past that we may need to wait until 4Q before we get a move lower in the EUR. I now think that may be incorrect – the move may have already begun, and it may be just getting started.

This is a good read:

I disagree, however, that low inflation will mean significantly higher labor compensation as a percentage of GDP. The mutli-decade decline is secular, IMO, and not likely to end soon.

New Yorker via FTA:

Most hedge funds fail: their average life span is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The over-all number did not decrease, however, because hope springs eternal, and new funds are constantly being launched.


  • Chicago PMI dropped sharply to 52.6 vs 63 exp and 62.6 prev
  • EU Unemployment ticked lower to 11.5% vs 11.6% exp and prev.
  • EU CPI declined to 0.4% vs 0.5% exp and prev. Core Inflation was stable at 0.8% as exp.
  • UK GfK Consumer Confidence declined to -2 vs +2 exp and -1 prev
  • Australia Building Approvals was stable at 16% YoY vs 23.8% exp and 14.3% prev


  • Thu: Australia PMI, China PMI,
  • Fri: EU PMI, US Employment, ISM
  • Mon: China Non-Mfg PMI, Australia Retail Sales, Turkey Inflation, EU PPI, AU Services PMI, Trade Balance
  • Tue: RBA, EU PMI, US ISM Non-Mfg, NZ Employment,
  • Wed: US Trade Balance, Australia Employment

Recap 2014-07-30


GDP data is usually not especially useful, but today is definitely an exception. First, there is a fair bit of uncertainty now as to what the trend growth rate for the economy really is. Second the net surprise over the past two quarters was massive. Between the surprise for Q2 (4.0% SAAR vs 3.0% exp) and the revision to Q1 (-2.1% vs -2.9% prev) the net surprise was 1.8% annualized. As a result, the curve bear steepened, despite the ADP miss.

Having said that, Personal Consumption was close to its 4 & 8 quarter moving averages of 2.3, which suggests that we shouldn’t change our estimates of trend growth much.

Frederik Ducrozet at Credit Agricole highlighted that the improvement in the ECB Lending Survey suggests higher EU loan growth ahead. As he noted, the gap between the two series below may close somewhat following the AQR and TLTROs:

An example of the Prisoner’s Dilemma (game theory):

While European governments deny paying ransoms, an investigation by The New York Times found that Al Qaeda and its direct affiliates have taken in at least $125 million in revenue from kidnappings since 2008, of which $66 million was paid just last year. In news releases and statements, the United States Treasury Department has cited ransom amounts that, taken together, put the total at around $165 million over the same period. These payments were made almost exclusively by European governments, who funneled the money through a network of proxies, sometimes masking it as development aid, according to interviews conducted for this article with former hostages, negotiators, diplomats and government officials in 10 countries in Europe, Africa and the Middle East. In its early years, Al Qaeda received most of its money from deep-pocketed donors, but counterterrorism officials now believe the group finances the bulk of its recruitment, training and arms purchases from ransoms paid to free Europeans. Put more bluntly, Europe has become an inadvertent underwriter of Al Qaeda. “Kidnapping for ransom has become today’s most significant source of terrorist financing,” said David S. Cohen, the Treasury Department’s under secretary for terrorism and financial intelligence, in a 2012 speech. “Each transaction encourages another transaction.” And business is booming: While in 2003 the kidnappers received around $200,000 per hostage, now they are netting up to $10 million, money that the second in command of Al Qaeda’s central leadership recently described as accounting for as much as half of his operating revenue. To minimize the risk to their fighters, the terror affiliates have outsourced the seizing of hostages to criminal groups who work on commission. Negotiators take a reported 10 percent of the ransom, creating an incentive on both sides of the Mediterranean to increase the overall payout, according to former hostages and senior counterterrorism officials. Only a handful of countries have resisted paying, led by the United States and Britain. Although both these countries have negotiated with extremist groups — evidenced most recently by the United States’ trade of Taliban prisoners for Sgt. Bowe Bergdahl — they have drawn the line when it comes to ransoms. It is a decision that has had dire consequences. While dozens of Europeans have been released unharmed, few American or British nationals have gotten out alive. A lucky few ran away or were rescued by special forces. The rest were executed or are being held indefinitely. “The Europeans have a lot to answer for,” said Vicki Huddleston, the former United States deputy assistant secretary of defense for African affairs, who was the ambassador to Mali in 2003 when Germany paid the first ransom. “It’s a completely two-faced policy. They pay ransoms and then deny any was paid.” She added, “The danger of this is not just that it grows the terrorist movement, but it makes all of our citizens vulnerable.”

Negotiators believe that the Qaeda branches have now determined which governments pay. Of the 53 hostages known to have been taken by Qaeda’s official branches in the past five years, a third were French. And small nations like Austria, Spain and Switzerland, which do not have large expatriate communities in the countries where the kidnappings occur, account for over 20 percent of the victims. By contrast, only three Americans are known to have been kidnapped by Al Qaeda or its direct affiliates, representing just 5 percent of the total. “For me, it’s obvious that Al Qaeda is targeting them by nationality,” said Jean-Paul Rouiller, the director of the Geneva Center for Training and Analysis of Terrorism, who helped set up Switzerland’s counterterrorism program. “Hostages are an investment, and you are not going to invest unless you are pretty sure of a payout.” Mr. Cohen, the United States under secretary for terrorism and financial intelligence, said information gathered by the Treasury Department suggested that Al Qaeda may no longer want to kidnap Americans, a tectonic shift from a decade ago.


  • FOMC was inline. Plosser dissented.
  • US 2Q GDP rose 4.0% SAAR vs 3.0% exp. Personal consumption improved to 2.5% vs 1.9% exp and 1.0% prev. The 1Q GDP figure was revised to -2.1% vs -2.9% prev.
  • US ADP declined to 218k vs 230k exp and 281k prev
  • Germany CPI declined to 0.8% as exp vs 1.0% prev
  • France Consumer Confidence was stable at 86 as exp
  • ECB publishes Jul euro area bank lending survey – overall encouraging news. Credit standards on loans to enterprises were eased by banks in net terms, for the first time since the second quarter of 2007. Banks reported a narrowing of their margins on riskier loans to enterprises, for the first time since the start of the survey. Loan demand was positive for all loan categories and recovered further.


  • Wed: UK GfK Consumer Confidence, AustraliaBuilding Approvals
  • Thu: Month End, Japan Housing Starts, EU Unemployment, CPI, US Jobless Claims, Chicago CPI, Australia PMI, China PMI,
  • Fri: EU PMI, US Employment, ISM
  • Mon: China Non-Mfg PMI, Australia Retail Sales, Turkey Inflation, EU PPI, AU Services PMI, Trade Balance
  • Tue: RBA, EU PMI, US ISM Non-Mfg, NZ Employment,
  • Wed: US Trade Balance, Australia Employment

Recap 2014-07-29


The US Consumer Confidence survey asks whether respondents are likely to buy a home in the next six months. It is interesting to note that the series has fallen off, but remains at historically elevated levels:

This series tends to lag home price momentum, but it is interesting to note how strong it is now, especially relative to where it was during the housing bubble. Also interesting is the differential between those who expect incomes to increase vs decrease. It has been ticking higher, but is still at levels last seen in the prior two recessions:

The JPMorgan Treasury all clients survey shows the most outright shorts since July 24, 2006. However, the last time the longs vs shorts differential was at these levels was two weeks ago, and before that, in May:

GS: Historically, a simple and effective way to gauge the pace of economic activity on the Euro periphery has been to look at the PMIs, which have tended to explain between 70% and 80% of the variation in GDP growth. Since the escalation of the Euro area crisis in 2010, this link has broken down, however, with the PMIs over-predicting the pace of recovery on a pretty systematic basis… with this the case in all the important periphery countries (Spain, Ireland, Italy, Greece). Furthermore, we found that the predictive link from PMIs to growth continues to work for the core (Germany and France), which led us to speculate that perhaps it was something specific to the periphery – for example, financing constraints on firms as a result of ongoing stress among periphery banks – that has caused the relationship to break down.

There is little evidence that the disconnect between the PMIs and periphery growth has been abating. If we only look at the data that are new since our initial piece (Q3 2013 to Q1 2014), we find that the residuals have not been shrinking across the periphery. The average size of the residuals between Q3 2013 and Q1 2014 is -0.4 standard deviations for Italy (narrower), -1.3 standard deviations for Spain (wider), -1.1 standard deviations for Greece (narrower) and -1.4 standard deviations for Ireland (wider). There is little pattern across the periphery of these residuals becoming smaller, even though financial conditions in Spain have improved materially… While a reading of 50 may in pre-crisis days have indicated positive growth on the periphery, it today may only indicate flat growth, as the external financing constraints prevent better sentiment from translating into growth.


  • US Consumer Confidence improved to 90.9 vs 85.4 exp and 85.2 prev
  • Japan Unemployment jumped to 3.7% vs 3.5% exp and prev. This may be an aberration, however, as the Job the Applicant Ratio ticked higher to 1.10 vs 1.09 exp and prev. Note that both measures were recently at the strongest levels in well over a decade.

  • Deutsche Bank Q2 stated pre-tax profit of €917mn is adjusted to strong clean pre-tax profit of €1,929mn (JPMe €1,701mn clean). Basel 3 CET1 fully loaded ratio at 11.5% up from 9.5% in Q1 14 (of which 2.5% driven by capital raise).
  • The China Electricity Council cut its 2014 demand-growth forecast to between 5.5% and 6.5%, from 6.5% to 7.5% – Bloomberg
  • Ukraine’s military is heading towards victory over rebel forces. While most of the focus has been on Russia’s supplies of sophisticated weaponry (inc the missile used to down the Malaysia Air plane), Ukraine’s military has enjoyed a series of battlefield victories and is close to delivering a knock-out blow against rebel forces. Donetsk is the last big revel stronghold and Ukraine is said to be preparing to weaken the city before launching an assault. Russia is still a wild card – as the rebels head towards defeat Moscow could accelerate its shipments of aid and weaponry – FT
  • a group of Argentina’s creditors who accepted restructured debt following a ’01 default have agreed to waive a clause that will help the government negotiate w/hold-out debt holders. This clause is widely believed to be the main obstacle preventing Argentina from striking a deal w/hold-outs. FT
  • High-touch equity trading is holding its own according to the WSJ. High-touch trading accounted for 55% of all equity volume in ’13, down only slightly from 57% in ’12 and 56% in ’11. Meanwhile, as overall market volumes shrink and liquidity thins, buy-side firms are conducting more of their business via high-touch (the present volume environment makes electronic trading more difficult). Buy-side firms say that one of the main advantages of high-touch trading is the ability to move a large block of stock w/o alerting or impacting the market. "As liquidity decreases, the attraction of high-touch trading increases," said Michael O’Brien, director of global trading at Eaton Vance. WSJ


  • Tue: NZ Building Permits
  • Wed: France Consumer Confidence, GermanyCPI, US ADP, FOMC, UK GfK Consumer Confidence, AustraliaBuilding Approvals
  • Thu: Month End, Japan Housing Starts, EU Unemployment, CPI, US Jobless Claims, Chicago CPI, Australia PMI, China PMI,
  • Fri: EU PMI, US Employment, ISM
  • Mon: China Non-Mfg PMI, Australia Retail Sales, Turkey Inflation, EU PPI, AU Services PMI, Trade Balance

Recap 2014-07-28


As others have pointed out, Chinese equities (many Asian indices actually) are breaking out. The Shanghai composite has just broken its multi-year downtrend line, but note that also happened at the end of 2012:

Price action of the Hang Seng index looks a bit better:

Note that we got a small rally in China-linked indices the last time the CNY weakened in 2012 as well. So we shouldn’t be too surprised if the rally continues. But given the return of lower USDCNY fixes, the rally may be on borrowed time:

NYC & Long Island is one of the unhappiest places in America, on par with Detroit, most of Indian and Kentucky, and Pennsylvanian coal country.

Interesting: do new phone releases really make phones slower? A good take on the use of data:


  • US Pending Home Sales declined 1.1% MoM vs +0.5% exp and +6.1% prev
  • Dollar Tree to acquire Family Dollar for $74.50/share $59.60 in cash and $14.90 shares, 22.8% prem to Friday’s close
  • EU may impose its strongest sanctions yet over Russia’s involvement in Ukraine including a ban of European purchases of bonds or shares sold by Russian state-owned banks. Russian equities down 2.5%. Washington also published images purporting to show artillery being fired from inside Russia into Ukraine. Russia for its part hasn’t backed down and actually is ramping its aid to separatist forces. Though Ukraine’s military has made impressive and important progress in recapturing control of rebel strongholds and may soon launch an offensive against Donetsk (the self-described “capital” of the Ukraine separatists).
  • Former majority owners of Yukos Oil Co. won a landmark $50 billion award against Russia for the confiscation of what was once the nation’s largest oil company after a decade-long battle.
  • The Ukraine military was making gains in its battle to retake Horlivka and is preparing to advance next to the separatist stronghold of Donetsk. On Friday the military said it regained control of the separatist stronghold of Lysychansk after several days of fierce fighting
  • China’s Bank of Communications jumped as much as ~10% after Reuters reported that the lender wants to sell more stakes to private investors. The co has applied to become the first state-controlled lender to pilot so-called hybrid ownership. Bloomberg


  • Mon: JapanUnemployment, Australia New Home Sales, UK House Prices
  • Tue: US Consumer Confidence, NZ Building Permits
  • Wed: France Consumer Confidence, GermanyCPI, US ADP, FOMC, UK GfK Consumer Confidence, AustraliaBuilding Approvals
  • Thu: Month End, Japan Housing Starts, EU Unemployment, CPI, US Jobless Claims, Chicago CPI, Australia PMI, China PMI,
  • Fri: EU PMI, US Employment, ISM
  • Mon: China Non-Mfg PMI, Australia Retail Sales, Turkey Inflation, EU PPI, AU Services PMI, Trade Balance

Recap 2014-07-25




  • US DGO rose 0.7% vs 0.5% exp, but Core Orders rose 1.4% vs 0.5% exp. However this was offset by a revision to last month’s print from +0.7% to -1.2%.
  • Japan June core national CPI came in at +3.3% YoY. Factoring out the Bank of Japan’s calculation of a +2.0 pp boost to the June national CPI from the tax hike, the CPI works out to +1.3%, decelerating 0.1 pp from +1.4% in May and 0.2 pp from +1.5% in April.
  • German GfK Consumer Confidence improved to 9.0 vs 8.9 exp and prev
  • German IFO declined to 108 vs 109.4 exp and 109.7 prev
  • UK 2Q GDP rose 0.8% QoQ as exp
  • NZ Business Confidence declined to 39.7 vs 42.8 prev, the lowest print in over a year
  • Turkey Trade Balance declined to -7.85Bn vs -7Bn exp and -7.11Bn prev. This is the worst print this year and puts the trade deficit back to average 2013 levels.
  • Turkey’s central bank demanded Thursday that local lenders convert their euro-denominated reserve requirements to dollars, in a move to safeguard mandatory deposits from currency fluctuations and losses following the ECB’s decision to cut rates below zero. Policy makers cited "the latest developments in global financial markets" for their decision. The measure goes into effect Aug. 1 and will replace 12.7 billion Euros that Turkish banks keep at the central bank with $17.1 billion. The revision means Turkish banks no longer can use Euros to meet reserve requirements for lira-denominated assets under the central bank’s reserve-option-mechanism.
  • HY Mutual Funds saw the largest outflow since June 2013. This week, HY Mutual Funds saw $2.4 bn in outflows which followed on the heels of last week’s $1.7 bn outflow. Similarly, Bank Loans Funds had $413 mm in outflows following last week’s $440 mm outflow.


  • Mon: US Markit PMI, US Pending Home Sales, Japan Unemployment, Australia New Home Sales, UK House Prices
  • Tue: US Consumer Confidence, NZ Building Permits
  • Wed: France Consumer Confidence, GermanyCPI, US ADP, FOMC, UK GfK Consumer Confidence, AustraliaBuilding Approvals
  • Thu: Month End, Japan Housing Starts, EU Unemployment, CPI, US Jobless Claims, Chicago CPI, Australia PMI, China PMI,

Recap 2014-07-23


BoE minutes were interesting. There were two interpretations discussed for why the correlation between wage growth and employment has fallen, but it is likely that both explanations are at play, as the minutes also suggested. Increased bifurcation of the labor market means that survey indicators of tighter labor mkts translated to lower earnings growth than in the past. And the effective supply of labor has increased… but mainly in lower income occupations. In aggregate, this may mean that tighter labor markets are mainly affecting income growth for higher income occupations, with the average income growth dragged lower by lower income occupations. With respect to the BoE’s inflation mandate, which focuses on average inflation, this may mean a lower neutral rate for any given Unemployment level relative to the previous cycle. In any case, the BoE’s thinking on this in the August Inflation Report will be very pertinent.

GS published a piece on Oil and Geopolitics that was quite interesting:

  • This surge in non-OPEC supply growth over the past year has not only been led by growth in North American “shale oil” production, but also by the broad recovery from the one-off impact of the Macondo spill in the Gulf of Mexico (GoM), which forced the industry to review all of its offshore facilities worldwide and led to a global collapse in productivity.
  • Based on Goldman Sachs’ proprietary Top 400 analysis of the world’s largest new oil and gas fields, shale oil has added 66 bn barrels of crude oil resources and 8 mmbd of future peak production, making higher cost fields redundant. This leads to a flattening of the cost curve around US$80-85/bbl Brent breakeven, effectively splitting the cost curve into an attractive part (<US$80/bbl Brent breakeven) and a redundant part (>US$85/bbl Brent). The current premium of spot oil prices relative to long-dated oil prices on the Brent forward curve provides further incentive to accelerate quick payback investments (shale) vs. other developments (traditional, deepwater, heavy oil).
  • The rise of shale has displaced an estimated $700 bn of capex that sits high on the cost curve, forcing a flattening of capex outside of North America at a time of material expansion of oil service capacity across the chain. This has the potential to lead to 5%-15% cost deflation across oil and gas developments after a decade of 10%+ inflation, and to an improvement of productivity. Coupled with changing supply dynamics, this points to a structural shift that will leave the oil market better equipped to deal with any future disruptions – from the Middle East, Russia or elsewhere.
  • As recently as 2012, the International Energy Agency (IEA) expected Iraq to account for 45% of global production growth through 2030, bringing it on par with the world’s largest oil producers. Iraq’s production gains depend heavily on political stability, as well as physical security. And there is no political scenario coming out of the current crisis in Iraq that would allow it to meet those expectations now.
  • In terms of the rest of the country, the Sunni areas that IS largely control today have some energy resources but are generally unexplored and are not producing much oil. So there is a concern that this Sunni middle would be very poor if the political dynamics changed in a way that halted oil revenue sharing throughout the country. In contrast, the southern Shia part of Iraq is home to the majority of current oil production. If those provinces took control of that oil and considered its sale and development to be a regional prerogative rather than a national one, it could open the door for neighboring Shiite Iran to gain significant sway over Iraqi oil policy.
  • Traditionally, Iran, Turkey, and Syria – all of which have substantial Kurdish populations – have seen an independent Kurdistan carved out of Iraq as a dangerous precedent for more fragmentation in the region. This has been a primary concern for Turkey in particular. But views in the region are changing and the Iraqi Kurds and Turkey have become very close in recent years, largely driven by Turkey’s recognition that the Iraqi Kurds could potentially meet a large share of Turkey’s energy needs. The Turks may now see an independent Iraqi Kurdistan as better than the alternative – an Iraq incapable of providing energy.


  • AU CPI rose 3.0% as exp vs 2.9% exp. The Trimmed mean CPI jumped to 2.9% vs 2.7% exp and 2.6% prev
  • BoE Minutes:
  1. Given the strength of survey indicators, it remained unclear whether growth would slow modestly in the second half of the year, as envisaged in the May Inflation Report. But there were some indications that a gradual slowing might take place.
  2. In an accounting sense, this increase in employment had been met by both an increase in labour force participation and a fall in unemployment; the unemployment rate had fallen to 6.6%. When combined with activity growth at or above longer-term averages, this implied further disappointment in productivity, with measured output per hour likely to have changed little in the first half of the year.
  3. In contrast to the strength of employment, wage growth had been surprisingly weak… Regular pay growth had fallen to 0.9% over the same period, around half a percentage point lower than expected at the time of the May Inflation Report. Half a percentage point of the weakness in AWE growth reflected a compositional effect: employment growth over the past year had been concentrated in lower-paid sectors.
  4. The Committee considered two possible explanations for the contrasting wage and employment data. The first was that the lags between any tightening in the labour market and an increase in wages were longer than the Committee had previously judged… An alternative explanation was that the effective supply of labour had increased, resulting in a greater degree of slack and so restraining wage growth… It was possible that elements of both explanations were at play to different extents in different parts of the labour market. The Committee would consider these and other possible explanations more fully in its preparations for the August Inflation Report.
  5. The Committee considered alternative interpretations of the data that might have different implications for monetary policy. On one interpretation, the risk of a small rise in Bank Rate derailing the expansion and leaving inflation below the target in the medium term was receding as that expansion became more established. Some survey indicators of wage growth had already picked up materially and, although the degree of slack was highly uncertain, it was likely that it was being absorbed more rapidly than had been envisaged in the May Inflation Report projection. Because estimates of the level of spare capacity had become more uncertain there was a case for setting policy with some reference to the rate at which it was being used up. A rise in Bank Rate at a time when the economy was growing strongly would facilitate a more gradual path thereafter
  6. On an alternative interpretation, although the domestic economy was growing at or above longer-term average rates, there was little indication of inflationary pressures building and there was uncertainty as to whether there had been a more structural change in the relationship between the labour market and inflation. Moreover, there were early signs that global growth was weakening, and an unexpected increase in interest rates when real wages were not yet rising could lead to an outsized reaction in asset prices and destabilise the recovery. On the central projection from May, conditioned on very gradual increases in interest rates, inflation had been forecast to return to the 2% target only after three years. A premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further stimulus uncertain.

The Fed is worried about the effects of the reverse repo facility on financial markets. They had originally planned on this facility being a key monetary tool but now it probably won’t play more than a supporting role because they’re nervous about the effects it could have on financial markets. Plosser said “there’s a lot of things that might happen to the plumbing of the money markets, and people have gotten…concerned that there’s a lot we don’t know.” WSJ

According to a Congressional hearing Tuesday, up to 25 additional US firms are considering tax inversion deals.

The Bank of Spain Monthly Bulletin raised both 2014 and 2015 GDP growth forecasts. Raises 2014 GDP growth forecast from 1.2% to 1.3% and raises 2015 GDP growth outlook from 1.7% to 2.0%. it noted that activity was recovering faster than expected.

Foreign ministers of the EU failed to agree yesterday on new EU sanctions against Russia, following the downing of the Malaysian plane last week. However, they opened the door for stage 3 sanctions if Russia does not cooperate with the West in the future.

JPM: The most noteworthy macro trend has been the continuing rotation into Europe and back into Emerging Markets as the Great Moderation is back in play… Issuance and inflows into European credit have reached record levels. Inflows into European High Yield reached an all-time high at nearly 19% of total assets under management in 1H14. Outflows from money market funds have surged but stayed within bond markets, fueling inflows into other fixed income asset classes, including emerging markets and municipal bonds. EM fixed income inflows have fully reversed $15bn of 1Q14 outflows, with a solid $20bn of inflows since April


  • Wed: EU Consumer Confidence, RBNZ, NZ Trade Balance, Japan Trade Balance, PMI, China HSBC Mfg PMI
  • Thu: EU PMI, UK Retail Sales, Italy Consumer Confidence, US Jobless Claims, US Markit Mfg PMI, New Home Sales, Japan CPI, NZ Business Confidence
  • Fri: GfK Consumer Confidence, IFO, Turkey Trade Balance, US DGO
  • Mon: US Markit PMI, US Pending Home Sales, Japan Unemployment, Australia New Home Sales, UK House Prices
  • Tue: US Consumer Confidence, NZ Building Permits