11 April 2014 The Big Picture • Focus on central banks, not data I really don’t see how this works. US jobless claims fell sharply, bringing the closely watched four-week moving average down to a new low for this economic cycle. Nonetheless, the fallout from Wednesday’s FOMC minutes predominated and Fed Funds rate expectations simply collapsed – down 10.5 bps in the long end (March 2017). The stock market rout spread from tech and social media to the broader market and the S&P 500 index fell 2.1% to be down for the year, dragging 10yr Treasury yields down 4 bps, and the dollar generally weakened. It’s off its lows, actually gaining against half its G10 counterparts and many EM currencies, but the result is clear – the market is focusing on what the FOMC says, not what the numbers imply. Even the Wall Street Journal, hardly a left-wing publication, said “financial markets are in thrall to central banks rather than caring about the health of the economy.” • Similarly, the market seems to be ignoring the Eurozone data as well. Yesterday saw a slew of Eurozone CPIs for March released and they were generally lower than expected, some flirting with or moving deeper into deflation. France’s CPI slowed to +0.7% yoy from +1.1% (expected: +0.8%), Denmark’s CPI slowed to +0.4% yoy from +0.5% (expected: +0.5%), Netherland’s slowed to +0.1% yoy from +0.4% (expected: +0.3%), and Greece slipped further into deflation at -1.5% from -0.9% (expected: -1.1%), as did Portugal at -0.4% vs -0.1%. Only Ireland saw its rate of inflation accelerate to +0.2% from -0.1%. This makes it harder for the ECB to claim that below-target inflation in the region is due to differences in how they calculate prices in Germany. We will get more data on this matter today, when the final CPIs for Germany and Spain are released. I still believe that eventually the ECB will have to ease policy further, which should provide a leg down for EUR/USD. However, it’s clear that the ECB has a greater tolerance for below-target inflation than I had thought, and this is likely to take longer than expected. If the April inflation data due out on April 30th don’t show any rise in inflation, that may cause more verbal intervention at least from the ECB, but it could take a political jolt from the May elections to focus the Council’s mind on the need to promote growth. Either that, or perhaps the 40,000 Russian troops allegedly massing on the Ukrainian border will eventually impact • Same in Japan, too. I expect the Bank of Japan to come in with another round of easing later this year as the economy slows. Nonetheless, there too the BoJ seems relatively confident in its current path and is in no hurry to change course. We will probably have to wait some time there as well before the authorities decide that they need to add to their stimulus. • A light economic calendar today. We get Germany’s final CPI for March, as mentioned above. The final figure rarely varies much from the initial estimate and so normally is not a big market-mover. The market pays more attention to the preliminary figure, which comes out one day before Eurozone’s CPI estimate. Nonetheless it would confirm the inflation slowdown in Eurozone’s largest economy and in Euro-area in general. • In the US, the PPI rate excluding food and energy for March is forecast to have remained unchanged at 1.1% yoy, while the University of Michigan preliminary consumer sentiment for April is forecast to have risen to 81.0 from 80.0 in March. • We don’t have any speakers on Friday’s schedule.
Posted on: Fri, 11 Apr 2014 07:05:56 +0000
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