Recap 2014-09-24


I’ve been out for a couple days, so apologies in advance if any of this sounds stale:

The weak German IFO prints today, along with Draghi’s comments earlier this week all increase the possibility of additional ECB easing. Of particular note is the decrease in the EU Consumer confidence indicator. After peaking in May, it has been falling for 4 straight months, and is now below the 12 month moving average. Historically, his is coincided with an extended period of weak momentum (2005) or outright recessions:

Historically, manufacturing PMI has been a good leading indicator for confidence – but in this case, it is suggesting that the deceleration is likely to continue for at least another quarter:

This is particularly important because US growth momentum seems to be slowing. Since February, US and EU growth momentum has broadly offset. With EU deceleration continuing and US accelerating petering out, global growth is likely to slow further in the coming quarter, which suggests a longer period of easy monetary policy.

ECB officials seem to be laying the ground work for additional action, mainly by making the Germans understand that there is a major disagreement here. Per Barclays:

In one of the most politically charged statements to come from the central bank, Benoît Coeuré, a member of the ECB’s executive board, urged Berlin to increase borrowing in order to support investment and cut taxes. Mr Coeuré included his demands in an op-ed penned with Jörg Asmussen, a former ECB official and now Germany’s deputy labour minister. The two officials also called on France to press ahead with labour market reforms while sticking to the budget deficit targets agreed with the European Commission.

This is notable because future ECB easing above the objections of the Bundesbankers will now not be as much of a surprise. By refusing additional fiscal measures, the Germans should now not be surprised if the ECB members from the other countries vote for additional easing. After all, they need to defend their credibility now – 5y5y inflation forwards hit all time lows (1.91%) on Friday:

As regular readers know, I’ve been wrongly expecting some sort of a bounce from Europe this year, but I am rethinking this view. I still think the conclusion of AQR could be a major catalyst, but the high frequency data following the results will now be even more important. A failure of a decent increase in net lending in 4Q and early 1Q will almost certainly result in additional easing, although whether it will be QE or some sort of TLRTO-like, bank oriented measure. It is possible that the AQR identifies some key blockages in the banking system that the ECB could plumb.

Looking at the longer run picture, such a break could be very significant. If the EU does go down the Japan-ization path, a rising debt/GDP is inevitable to avoid large scale social unrest. And the realization of EU countries that they can override German votes at will on this issues may lay the groundwork for an eventual sovereign debt framework that is fully backed by the ECB printing press.

Anyway, this is all probably bullish for the long end. Despite the widespread agreement that the US isn’t Europe, the correlation between 30 year US and EU yields have been quite strong for a long time. But the short ends are almost certainly going to uncouple. On that note, several commentators have noted the breakout in US front end yields. Some have even noted that they may post a larger problem for risk assets as a whole. But one thing to note is that this entire move has been more than priced in. The chart below shows the 2y swap yield in white and the 2y swap yield, 1y forward in orange, and leading by a year. Markets are already discounting a 100bp rise in the 2y yield over the next 12 months – such a move, while a breakout on the spot charts, would not constitute a surprise.

Separately, this is interesting:

78 percent of never-married women say that a mate with a steady job would be very important to them, more than any other quality in choosing a spouse. Pew analyzed the pool of employed, unmarried men, compared with all unmarried women. There are 65 employed men for every 100 women.


  • German IFO declined to 104.7 vs 105.8 exp and 106.3 prev
  • Italy Consumer Confidence improved to 102 vs 101 exp and 101.9 prev
  • US New Home Sales jumped 18% MoM vs 4.4% exp
  • WSJ: China Considers Replacing Central Bank Head, Party Officials Say Top Contender to Replace Zhou Xiaochuan at PBOC Is Shandong Gov. Guo Shuqing, Officials Say
  • Stock buyback programs by listed Japanese companies have reached the highest level in six years. Nikkei


  • Thu: EU Money Supply, US Jobless Claims, Durable Goods Orders, Markit Services PMI, Japan CPI
  • Fri: German & French Consumer Confidence, U Michigan Confidence
  • Sun: Bernanke Speaks
  • Mon: German CPI, US Core PCE, Pending Home Sales, NZ Building Permits, UK GfK Consumer Confidence, Japan Jobless Rate, NZ Business Confidence
  • Tue: Month End, UK House Price, EU Employment, EU CPI, Canada GDP, Chicago PMI, US Consumer Confidence, Japan Mfg PMI, AU Retail Sales