G3 Recap 3-3-11

Main Items:

  • US Initial Jobless Claims declined sharply to 368k last week vs 395k expected and 391k previously. The 4wk moving average is now below 400k for the first time since July 2008.
  • Trichet said Risks to Inflation have moved to the “Upside” and that “Strong vigilance is warranted.” Growth Risk assessment is now balanced from negative previously. He also did NOT reiterate that rates were appropriate. The market interpreted this as a sign that the ECB will hike next month. Trichet also said that this does not mean that this is the start of “a series of hikes,” something that he also said the last time the ECB started a 2 year long tightening cycle.
  • 2011 Inflation forecast mid point at 2.3% vs 1.8% previously,
  • 2012 Inflation forecast mid point is now at 1.7% vs 1.5% previously.
  • 2011 GDP forecast midpoint at 1.7% vs 1.4% previously.

10k Telecom AG employees and Thousands of German public sector employees went on strike yesterday following failed talks. The union had demanded a pay raise of 6.5% over 2 years, vs an offer of 2.17%. – Der Spiegel

US ISM Non-Manufacturing improved to 59.7 in Feb vs 59.3 expected and 59.4 previously. Highest reading since 2005.

Overseas Data:

  • China Non Manufacturing PMI dropped sharply to 44.1 in Feb vs 56.4 previously. The HSBC Measure, however, was basically unchanged at 51.9 vs 52.0 previously
  • Italian PMI Services declined to 53.1 in Feb vs 51.1 expected and 49.9 previously.
  • EU PMI Services was finalized at 56.8 from 57.2 previously.
  • UK PMI Services declined to 52.6 vs 53.7 expected vs 54.5 previously
  • EU GDP rose 0.3% QoQ in 4Q as expected, driven by net trade, but dragged down by inventory.


  • Well, regardless of what the ECB actually winds up doing, the market has priced in roughly 3 hikes for 2011. This has driven the EUR up to 1.40, and likely higher in the coming weeks, to levels not seen since late 2009 and before that 2008:

    This is important because by my calculations, since 2Q2009, net trade has contributed 1.6% of the 2.6% of real EU growth: (note how the drop in contribution from trade fell sharply following the late 2009 EURUSD rally)

    This is the problem of having a CB that only targets inflation. What, trade contributes 60% of growth, we have an estimated output gap of -3%, UE of 10%, and the periphery is in a recession? Great, let’s tighten!
    Model outputs suggest that the EU will be hiking about 6 months too early, even without the issues of the periphery:

    Presumably this move is in response to the recent strikes and wage increases in Germany. The ECB probably thinks it needs to preemptively hike to stave off second round effects. But the increase in EUR is likely to weaken growth sharply in the quarters ahead, which, when combined with stabilizing oil prices, will allow the ECB to pause. In the meantime, however, EU asset prices are going to move and get out of the way! Case in point: relative CB expectations have historically provided a good leading indicator for relative equity performance, with a lag of 6-18 months: (Dax / SPX in white, US 2y – German 2y in green)

2 thoughts on “G3 Recap 3-3-11

  1. reaction of PM and flattening of curves to data made sense today in an otherwise bewildering day. guess a pretty good nfp number built in now given all the indicators … i will refrain from any guesses as to how tomorrow will pan out. sometimes it just doesn’t pay to be a contrarian, despite temptation.

    it would seem though that eur curve could have more room to flatten on a policy error and as real money laggards adjust duration. everyone seems bewildered at the ecb, but it does seem to be about brinkmanship in relation to the unions and upcoming leverage on negotiations of bailout funds/conditions and demonstrating that weber not required to enforce hawkish bias. maybe draghi trying to prove he’s not a dove in order to get more backing for the presidency also contributed to today’s rhetoric as it echoed what he said a few days back.

    maybe the best position in europe is to stay outright short peripheral countries where cheap funding is still an issue for banks and current account balances an issue too; so a few choices … this will be interesting but the lags as you mention between policy actions and knock on effects key. heck, maybe selling ibex vs buy dax or spx makes sense now.

    if the ecb does hike (not convinced yet), depending in their language and if things start to derail in eruope, selling sek/nok will also make sense but too early for now to contemplate.

    rbnz cutting 50? not so sure there either as policy not exceptionally tight versus trend nominal gbp and they do have a headline inflation target as well i believe.

    1. Yeah, I’m not sure how to play it other than go long EUR and short EU stock indicies on and RV basis against US or Japan. I’m sure the ECB shouldn’t hike, but personally, it seems like to me they’ve already committed to hiking next month. Not sure about SEK/NOK, SEK may actually do better since they get more competitive vs EUR and can export more industrial stuff?

      Not sure about RBNZ, I think I’m more in the hiking camp actually, but not convinced enough to do anything.

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