The market is getting all worked up about comments from the ECB’s Bini Smaghi on the need for responding to the inflation threat with potential rate hikes. Should we take this seriously in the bigger perspective or is this saber-rattling a la Trichet in July of 2008?
UK Retail Sales and more
A very strong Retail Sales result for January should not come as a huge surprise after century-long snowfall records in the UK fell in December kept many literally bound to their homes. Let’s see how the February demand numbers come in before drawing any conclusions. The 1.6% month-on-month increase comes after a -1.0% drop in December (revised down from -0.3% original estimate.) FTAlphaville is running with an article about the UK’s current inflation measures and whether they have under-estimated the “true” CPI in the past and whether new changes in inflation calculation increase the risk of even higher inflation levels going forward (Also see Miserable like it’s 1994, in Britain ) which discusses how bad the current inflation/unemployment combination is in Britain relative to other areas of the world. ). The day’s events in the UK have the market ratcheting their interest rate expectation for the BoE back higher and the pound has responded versus the Euro once again and is pushing the recent range highs in GBPUSD as well.
A very strong Retail Sales result for January should not come as a huge surprise after century-long snowfall records in the UK fell in December kept many literally bound to their homes. Let’s see how the February demand numbers come in before drawing any conclusions. The 1.6% month-on-month increase comes after a -1.0% drop in December (revised down from -0.3% original estimate.) FTAlphaville is running with an article about the UK’s current inflation measures and whether they have under-estimated the “true” CPI in the past and whether new changes in inflation calculation increase the risk of even higher inflation levels going forward (Also see Miserable like it’s 1994, in Britain ) which discusses how bad the current inflation/unemployment combination is in Britain relative to other areas of the world. ). The day’s events in the UK have the market ratcheting their interest rate expectation for the BoE back higher and the pound has responded versus the Euro once again and is pushing the recent range highs in GBPUSD as well.
Euro whiplash
The ECB’s Bini Smaghi was out today suggesting that “as the economy gradually recovers and global inflation pressures arise, the degree of accommodation of monetary policy has to be monitored and, if needed, corrected.” This is not particularly revolutionary stuff, but the market responded to the rhetoric to the tune of about 5 bps of additional expectations for the ECB over the next year tacked on to year-forward projection as this and other comments suggest a degree of severity of worries about inflation that were not as evident at the last ECB meeting.
The ECB’s Bini Smaghi was out today suggesting that “as the economy gradually recovers and global inflation pressures arise, the degree of accommodation of monetary policy has to be monitored and, if needed, corrected.” This is not particularly revolutionary stuff, but the market responded to the rhetoric to the tune of about 5 bps of additional expectations for the ECB over the next year tacked on to year-forward projection as this and other comments suggest a degree of severity of worries about inflation that were not as evident at the last ECB meeting.
The Bini Smaghi comments have EURUSD back on the warpath higher, and in fact, all Euro crosses are experiencing some degree of whiplash as the March Euribor has plunged about 6 ticks in the wake of the comments. It’s incredible to watch EURUSD ratchet higher as next Friday’s Irish elections approaches, but the USD is simply unable to gain any credibility as long as the focus is on higher rate expectations in general and as long as risk appetite remains bubbly. The ECB’s focus here on inflation when the PIIGS crisis is so far from any resolution has Trichet July 2008 rate hike written all over it. The eventual solution to the PIGS problem (if there is a solution) is through ECB loosening/QE/money printing or whatever you want to call it. It’s hard to stomach the ECB’s sabre rattling on inflation when the EU still has the fight of its life ahead of it this year – but the market doesn’t care, and who is to say that this focus might see EURUSD back to 1.3900 or 1.4000 before we remember what is going on here?
Chart: EURUSD
Here we go again, with rate hike hysteria striking the market after Bini Smaghi’s comments today. This has the EURUSD higher through the weekly pivot again and above the recent shorter term descending trendline. Let’s see how long the market can hold on to the idea that the EuroZone is over the PIGS situation and is ready to get back to a normal recovery and policy tightening cycle.
Here we go again, with rate hike hysteria striking the market after Bini Smaghi’s comments today. This has the EURUSD higher through the weekly pivot again and above the recent shorter term descending trendline. Let’s see how long the market can hold on to the idea that the EuroZone is over the PIGS situation and is ready to get back to a normal recovery and policy tightening cycle.
An American (Bernanke) in Paris
Bernanke was out speaking in Paris as the G20 summit gets underway in Paris and his speech contained rather direct rhetoric on China’s yuan policy and the dangers/imbalances it presents to the world. He encouraged a “reshaping” of the international monetary system and strengthening the “rules of the game” to help force nations to allow more currency flexibility. This frank rhetoric is very interesting coming from a central banker (it also helps the Fed partially scapegoat its own culpability – how convenient). It will be very interesting to see whether China lashes out at the Fed chairman’s words.
Bernanke was out speaking in Paris as the G20 summit gets underway in Paris and his speech contained rather direct rhetoric on China’s yuan policy and the dangers/imbalances it presents to the world. He encouraged a “reshaping” of the international monetary system and strengthening the “rules of the game” to help force nations to allow more currency flexibility. This frank rhetoric is very interesting coming from a central banker (it also helps the Fed partially scapegoat its own culpability – how convenient). It will be very interesting to see whether China lashes out at the Fed chairman’s words.
Looking ahead
We’ve got another G-20 meeting this weekend, this time in Paris. Global imbalances are foremost on everyone’s mind, in particular China’s yuan policy. The IMF was out recently suggesting that the USD is still too strong – which was more likely a veiled reference to the fact that China’s yuan is far too weak – the US is certainly doing everything within its power to destroy its currency. While the need for action is clear, these unwieldy summits rarely result in clear policy initiatives. The key to this weekend’s meeting is watching how China behaves at the meeting. It is terrified to allow its currency to appreciate too much because of the potential effect on its export-centered industries, but at the same time, a yuan strengthening would be one of the more direct and imbalance-relieving methods for de facto policy tightening. On that note, the regime ratcheted bank reserve requirements higher once again ahead of this weekend’s meeting.
We’ve got another G-20 meeting this weekend, this time in Paris. Global imbalances are foremost on everyone’s mind, in particular China’s yuan policy. The IMF was out recently suggesting that the USD is still too strong – which was more likely a veiled reference to the fact that China’s yuan is far too weak – the US is certainly doing everything within its power to destroy its currency. While the need for action is clear, these unwieldy summits rarely result in clear policy initiatives. The key to this weekend’s meeting is watching how China behaves at the meeting. It is terrified to allow its currency to appreciate too much because of the potential effect on its export-centered industries, but at the same time, a yuan strengthening would be one of the more direct and imbalance-relieving methods for de facto policy tightening. On that note, the regime ratcheted bank reserve requirements higher once again ahead of this weekend’s meeting.
Next week’s focus shifts to Friday’s election in Ireland as every day brings Ireland a day close to sovereign default – but who cares about that when the March Euribor is off 5 ticks today?
Be careful out there.
Economic Data Highlights
- Japan Jan. Nationwide Department Store Sales fell -1.1% YoY vs. -1.5% YoY in Dec.
- Germany Jan. Producer Prices rose +1.2% MoM and +5.7% YoY vs. +0.6%/+5.1% expected, respectively and vs. +5.3% YoY in Dec.
- Sweden Jan. Average House Prices out at 2.179M vs. 2.064M in Dec.
- UK Jan. Retail Sales ex Auto Fuel out at +1.6% MoM and +5.3% YoY vs. +0.2%/+4.3% expected, respectively and vs. +0.3% YoY in Dec.
- Canada Jan. Consumer Price Index out at +0.3% MoM and +2.3% YoY vs. +0.3%/+2.4% expected, respectively and vs. +2.4% YoY in Dec.
- Canada Jan. CPI Core out at 0.0% MoM and +1.4% YoY vs. +0.1%/+1.5% expected, respectively and vs. +1.5% YoY in Dec.
Upcoming Economic Calendar Highlights
- US Treasury Secretary Geithner to speak at G20 (1445)
- New Zealand Jan. Performance of Services Index (Sun 2130)
- Australia Q4 CBAHIA House Affordability (Sun 2330)
- UK Feb. Rightmove House Prices (Mon 0001)
- New Zealand Jan. Credit Card Spending (Mon 0200)
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