G3 Recap 2-15-11

Main Items:

  • US Retail Sales were broadly weaker than expected, with the ex Autos & Gas measure up 0.2% MoM in Jan vs 0.4% expected, and the Dec print revised down from 0.4% to 0.1%. The Headline Print was also weaker, printing 0.3% Mom vs 0.5% expected. Finally, the core print rose 0.4% MoM, vs -0.1% previously. As is the case for all January data, weather likely had a large impact.
  • US Import Price Index jumped to 5.3% YoY in Jan vs 4.8% expected and 4.4% previously.
  • Empire manufacturing printed 15.4 in Feb vs 15.0 expected and 11.92 previously.
  • NAHB homebuilder index was unchanged at 16 as expected.
  • European officials signaled that the new bailout fund would have a lending capacity of EU500B, nearly 2x the current capacity. There are still several outstanding issues that have to be resolved, however there are signs that substantial progress was made during the meetings today. WSJ
  • BoE Governor King’s letter was interpreted hawkishly, noting that the committee’s central view was that "under the assumption that Bank Rate increases in line with market expectations … inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead,” even though “attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.” As the market is pricing in hikes by June, the market interpreted this to mean that the MPC could move soon. Furthermore, this is a hawkish update vs the November Inflation Report, which judged that inflation was more likely to be below 2% at the 2 yr horizon.
  • The German tabloid Bild reports that J Weidmann will become the new Bundesbank President

Overseas Data:

  • German Zew index of Economic Sentiment rose to 15.7 in Feb vs 20.0 expected and 15.4 previously. The EU Zew index, however, improved to 29.5 in Feb vs 28.5 expected.
  • UK CPI rose to 4.0% YoY in Jan as expected, vs 3.7% previously.
  • Riksbank hiked 25bps today to 1.5% as expected. It now expects the policy rate to average 2.25% in 4Q vs 2.03% previously
  • Chinese CPI rose 4.9% YoY in Jan vs 5.4% expected and 4.6% previously. The NBS announced revisions to the CPI basket, where the weight for food component came down 2.21% while housing proportion was up by 4.22% compared to the old weights.
  • Chinese M1 growth slowed to 13.6% YoY in Jan, vs 19.6% expected and 21.2% previously. Seasonal effects likely played a large role.


  • There has been a lot of talk recently about the Federal budget and the size of the deficit. What has been surprising is that people have not connected the size of the deficit with its impact on the economy. A Federal budget deficit of 10% of GDP is generating less than 5% of nominal growth! The deficit is adding 1.1 trn to personal income, the majority of which is likely to have been spent immediately. What’s going to happen when that gets cut? The perma-bears have been talking about this for a long time, but I’d expected that the press would follow up on the impact of lower future deficits on the economy given the recent budget talk.
    The chart below graphs the relationship. Correlation between the yearly change of each variable is -39% over the sample, and -46% since 1990, with a Beta of -0.7 and -0.5, and T-Statistics of -2.6 and -2.2, respectively. Thus, if historical relationships hold, a reduction in the budget deficit from -10% to the long run average of -2.5% over 3 years (per the CBO Outlook) is likely to reduce growth by roughly (7.5% / 3) * 0.5 = 1.25% each year. As growth has averaged 3% YoY from 1990-2007, such an impact could reduce growth to under 2% annually, well below the rate necessary to lower UE.

  • BAML Survey: A net 67 percent of respondents, who together manage $569 billion, had an “overweight” position on global equities, the highest level since the survey first asked the question in April 2001. Meanwhile, a net 9 percent is “underweight” cash, the lowest allocation since January 2002. – BBG


4 thoughts on “G3 Recap 2-15-11

  1. without getting into too much economic theory, your empirical analysis of government debt impact on GDP has been analyzed from a causality perspective by Steve Keen and a few other but looking at total debt with some interesting findings. exert-

    **In contrast to neoclassical economics, I have a credit-oriented analysis of capitalism in which aggregate demand is derived not merely from incomes but from the change in debt. On this basis, the change in aggregate demand will reflect both the change in incomes (GDP) and the change in the change in debt: so the acceleration or deceleration of debt levels adds or subtracts from the change in aggregate demand. This affects both economic performance and hence employment, and asset price change—since from this perspective, aggregate demand is spent purchasing both new goods and services and existing assets.**

    if households continue to de-leverage in the next few years and the rate of increase of government debt decreases (you don’t actually need it to drop), you have 2 shocks to a credit or debt based economy that will bring back deflationary forces. but that’s not a trade for the next few months … at least as long as we have QE all is fine .. ish … maybe …

    in europe overall however, i am not so sure if sometime later this year, this process doesn’t hit the data as real discretionary incomes continue to contract at the same time as government spending cuts really come into effect … i.e. periferals rolling back into recession.

  2. and forgot to mention that this possibly one of the reasons why the BOE (apart from output gap arguments) is very reluctant to tighten policy as we also get fiscal tightening happening in the UK from april onwards.

  3. Thanks Bert. That sounds exactly right. Looks like 2011 – 1H 2012 is going to play out as the eye of the storm.

    Note sure if you saw the Hayman investor Letter today, but some similar issues are touched upon:

  4. wow, those sure are some interesting expected headline inflation numbers for EM … QE destroying realized vol in equity … which has gotta be a buy at some stage before the program ends. cheers

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