Japan’s Abe calls the end of Japan’s deflation era as the loonie collapses further versus its major peers

Jan 23 • Morning Roll Call • 2385 Views • Comments Off on Japan’s Abe calls the end of Japan’s deflation era as the loonie collapses further versus its major peers

shutterstock_82657219As the Davos World Economic Forum gets into full flow it’s tricky to keep up with the appearance schedule. Moreover, it’s increasingly difficult to understand why some ‘delegates’ and guest speakers are given so much air time.

The legendary UK entrepreneur and founder of Virgin, Richard Branson, gave a speech suggesting that the “war on drugs” had failed. Happy to admit his liking for the odd spliff or two, he probably exited stage left to ‘unwind’, whilst someone from the USA prison industrial complex approached him in a black suit and sunglasses reminding him of why the war on drugs is so good for their business in the USA.

However, there has been the occasional fascinating insight into the mentality of some of the ‘great and good’ involved, especially Microsoft founder Bill Gates who will be attending the forum. As a pre-cursor to his attendance he offered up a release, in the form of an annual letter from his and his wife’s charitable foundation, full of intrigue in which he predicted that by 2035 much of the planet will be so wealthy swathes of poverty will be eliminated forever.

You have to wonder if some of his fellow movers and shakers, the 85 who Oxfam listed controlling half of the planet’s wealth and resources, won’t pull him to one side when he touches down in Switzerland, squeeze his arm reminding him that; “things don’t work like that Bill, not now and they never will. It’s not enough for us to succeed, they must fail”. Or will they just slow hand clap if he takes the stage whilst thinking; “bless his little white cotton trainer socks, where would we be without dreamers like Bill and his wife Melissa?”

Back down to earth, to more humdrum fundamental news events, Europe posted some improved data with regards to the debt versus GDP for the region. The debt fell to 92.7% and it was the first decrease in the EU extended region debt since before the financial crisis broke in 2007.

Looking towards North American data Canada’s central bank revealed that their base interest rates would stay the same, whilst in their notes concerning future policy they did leave the door open in relation to further stimulus and a rate reduction. As a consequence the loonie continued its drop, by approx. 1.1% on the day.

Finally, returning back to Davos, the Japanese prime minister Shinzo Abe gave a speech in which he ended with warning the forum of the military build-up in the region by China and N.Korea, but also discussed his belief that finally, through the massive monetary stimulus the economy has experienced, Japan is finally coming out of deflation. That’s right, trillions of yen injected into the Japan economic system has begun to end deflation, a play straight from a schoolboy’s economic handbook.

Bill Gates, who is expected to be at Davos, has been making some big predictions

The billionaire philanthropist thinks there will be almost no poor countries left in the world by 2035. In the Gates Foundation’s annual letter, he and his wife Melinda, tackle head on “the myth that poor countries are doomed to stay poor.

More than 70% of countries will have a higher income than China does today, while child mortality in developing countries will fall sharply. I am optimistic enough about this that I am willing to make a prediction. By 2035, there will be almost no poor countries left in the world. (I mean by our current definition of poor*). Almost all countries will be what we now call lower-middle income or richer. Countries will learn from their most productive neighbours and benefit from innovations like new vaccines, better seeds, and the digital revolution. Their labour forces, buoyed by expanded education, will attract new investments. Specifically, I mean that by 2035, almost no country will be as poor as any of the 35 countries that the World Bank classifies as low-income today, even after adjusting for inflation.

Euro area government debt down to 92.7% of GDP

First decrease in absolute terms for the euro area since fourth quarter of 2007 At the end of the third quarter of 2013, the government debt to GDP ratio2 in the euro area (EA17) stood at 92.7%, compared with 93.4% at the end of the second quarter of 2013, the first fall in absolute terms since the fourth quarter of 2007. In the EU283 the ratio increased from 86.7% to 86.8%, mainly due to exchange rate effects. Compared with the third quarter of 2012, the government debt to GDP ratio rose in both the euro area (from 90.0% to 92.7%) and the EU28 (from 84.9% to 86.8%).

Bank of Canada maintains overnight rate target at 1 per cent

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent. Inflation in Canada has moved further below the 2 per cent target, owing largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period. The Bank expects inflation to return to the 2 per cent target in about two years, as the effects of retail competition dissipate.

UK BoE/MPC monetary policy notes

Looking beyond the immediate policy decision, the Committee noted that while the recovery was becoming more firmly entrenched, productivity growth had been disappointing, and unemployment had fallen faster than expected. Inflation had returned to the 2% target, however, and cost pressures were subdued. Members therefore saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future. Moreover, it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained. Consequently when the time did come to raise Bank Rate, it would be appropriate to do so only gradually.

Shinzo Abe: we are about to escape deflation

Abe joked that he didn’t know who coined the term Abenomics, but he’d have to use his own name to describe his policies for a bit longer. He then declares that Japan is poised to break free from the chronic deflation that has gripped it for so many years, declaring:

High wages, long overdue will lead to increased productivity. Japan is now getting on track for fiscal consolidation. Our growth rate has changed dramatically, from negative to positive. A new dawn is breaking over Japan, we will liberalise the energy markets, and we will allow private firms to break into farming.

Market overview at 10:45 UK time

The DJIA closed down 0.25%, SPX up 0.06% and the NASDAQ up 0.41%. Euro STOXX closed down 0.06%, CAC up 0.03%, DAX down 0.10% and the UK FTSE down 0.12% despite extremely positive unemployment data.

Looking towards Thursday’s market open the DJIA equity index future is down 0.23% at the time of writing, the SPX future is up 0.01% and the NASDAQ future is up 0.30%. Euro STOXX is down 0.03%, DAX future down 0.07%, CAC up 0.06% and the UK FTSE up 0.01%.

NYMEX WTI oil finished the day up 1.86% at $96.74 per barrel, with NYMEX nat gas up a substantial 5.94% at $4.69 per therm. COMEX gold finished the day down 0.44% at $1236.30 per ounce with silver down 0.43% at $29.78 per ounce.

Forex focus

The Dollar Spot Index, which tracks the U.S. currency versus 10 major counterparts, added 0.1 percent to 1,035.45 late New York time after rising to 1,037.75 yesterday, the highest since Sept. 6th. It last completed a seven-day rally on May 17th.

The greenback appreciated 0.1 percent to $1.3547 per euro after earlier falling as much as 0.2 percent. The dollar climbed 0.2 percent to 104.52 yen. The 18-nation shared currency traded at 141.60 yen. The dollar rose for a seventh day, its longest rally in eight months, amid speculation reports on jobless claims and housing prices will reconfirm the Federal Reserve’s decision to trim monthly bond purchases.

Canada’s dollar depreciated 1.1 percent to C$1.1087 per U.S. dollar and touched C$1.1092, the weakest since September 2009. The loonie slumped again as the Bank of Canada Governor Stephen Poloz said the direction of the BOC’s next move will depend on the economy’s evolution, but that the currency remains strong enough to be a challenge for exports. The benchmark rate on overnight loans between commercial banks was held at 1 percent, where it’s been since September 2010.

Sterling appreciated 0.7 percent to 81.74 pence per euro after advancing to 81.68 pence, the strongest since Jan. 10, 2013. Sterling rose 0.6 percent to $1.6575. The pound climbed to the strongest level in a year against the euro as the Office for National Statistics said unemployment fell to 7.1 percent in the three months through November, approaching the 7 percent threshold at which Bank of England officials say they will review borrowing costs.

Bonds briefing

The U.S. 10-year debt yield rose four basis points, or 0.04 percentage point, to 2.87 percent late p.m. New York time. The 2.75 percent note due November 2023 fell 10/32, or $3.13 per $1,000 face amount, to 99. The yield dropped to 2.82 percent on Jan. 17th, the lowest level since Dec. 11th. Five-year note yields added six basis points to 1.70 percent. Treasuries fell, with benchmark 10-year yields climbing from almost a six-week low, as signs the U.S. recovery is accelerating boosted speculation the Federal Reserve will keep reducing its debt-purchase program.

Germany’s 10-year yield climbed two basis points to 1.76 percent after dropping nine basis points during the previous four days. The nation auctioned 3.52 billion euros of notes due in December 2015 on Wednesday at an average yield of 0.15 percent, compared with 0.21 percent at the previous sale on Dec. 11th.

Spanish 10-year yields were little changed at 3.74 percent at the market close of trading in London after dropping as much as six basis points. The price of the 4.4 percent bond maturing in October 2023 was 105.33.

Fundamental policy decisions and high impact news events for January 23rd that could affect market sentiment

Thursday begins with French PMIs, manufacturing expected to come in at 47.6, with services PMI expected in at 48.2, both an improvement on the previous month’s data. Spain’s unemployment rate is expected to print at a desperate 26%. Germany’s flash manufacturing print is expected in at 54.7, with services in at 54.2, both prints up from the previous month.

Europe’s current account is expected in at €19.2 billion positive, a reduction of the previous month’s figure of €21.8 billion. Europe’s flash PMI is expected in at 53.2, up from 52.7. Services PMI for Europe is expected in at 51.5, up from 51 the previous month.

Core retail sales for Canada are expected in at 0.3%, a fall from 0.4% the previous month. Retail sales is expected in at 0.3%, up from -0.1% previously. In the USA the weekly unemployment claims is expected to come in at 331K, whilst the USA flash manufacturing data is expected to come in at 55.2, up from the previous month’s figure of 54.4. Existing home sales in the USA are expected in at 4.99 million. Gas and crude oil storage inventories may provide reasons for oil and gas prices to rise (or fall) significantly when released on Thursday.
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