Will the EU ignore the OECD’s suggestion regarding quantitative easing?

Nov 20 • Morning Roll Call • 1659 Views • Comments Off on Will the EU ignore the OECD’s suggestion regarding quantitative easing?

burying-moneyTuesday proved to be a fascinating day for news that wasn’t previously pencilled in as high impact news events. The OECD issued another estimate with regards to global economic growth, whilst the troika is (as predicted) having difficulty in agreeing new terms with the Greek government in relation to further bailout funds. Germany’s ZEW index came in ahead of predictions and we learned that the USA census and BLS can’t be trusted on jobs data, given that it was falsified before the last USA election in order to paint a rosier picture than the reality.

The OECD suggesting that the ECB and EU should indulge on a programme of ‘QE to infinity’ whilst pointing to the USA’s version as a success, must have had Germany’s Chancellor Angela Merkel experiencing emotions of; hysterical laughter, anger and astonishment in equal measures given that QE is ‘off the menu of options’ as it would break the constitutional agreements in place.

It really only seems like yesterday since Merkel sent poor little Timmy Geithner back to the USA with a flea in his ear for suggesting the same, the message being; “we won’t take any lessons from the USA on fiscal and monetary responsibility”. And given that the ECB and Eurogroup appear to have reached the bottom of this cycle of the recession then the LTRO and OMT programmes may have already had enough of the desired effect.

Presumably Merkel will have been incandescent reading the statement of European Central Bank vice president Vitor Constancio. He spoke about the possibility of the ECB embarking on a full-blown quantitative easing bond-buying programme to stimulate the euro economy on Tuesday. QE hasn’t been discussed “in any detail” he added. Merkel can only hope he was off the reservation whilst talking down the value of the euro.

There is no doubt that the austerity measures have been horrible, and some of the unemployment figures, particularly youth unemployment, are horrendous, but the ECB and EU do appear to have got ahead of their curve without the need of the ECB to swell its balance sheet, in a similar fashion to the USA Fed, just to buy a decimal point or two of growth, with no discernible growth on Main Street, only Wall Street.

 

OECD Economic Outlook

The global economy continues to expand at a moderate pace, with some acceleration of growth anticipated in 2014 and 2015. But global growth forecasts have been revised down significantly for this year and 2014, in large part due to weaker prospects in many emerging market economies (EMEs). Downside risks dominate and policy must address them. Contrary to the situation in the early phases of the recovery when stimulus in EMEs had positive spillovers on growth in advanced economies, the global environment may now act as an amplifier and a transmission mechanism for negative shocks from EMEs.

The OECD’s new report on the global economy said the ECB should prepare to launch unconventional monetary policy measures. It would be a minefield for the ECB, whose bonds would it buy and would the German constitutional courts immediately try to block it, as an unacceptable monetisation of one euro zone country’s debts by the rest?

While the OECD has raised its forecast for UK growth next year to 2.5%, from 1.6%, it had less cheering news for Germany. The report into the global economy included a call to Berlin to liberalise its service sector and stimulate investment. The OECD also cut its growth forecast for Germany in 2014, from 1.9% to 1.7%.

 

Pier Carlo Padoan, OECD chief economist, stated that under-investment in Germany was helping cause its current account surplus.

“More investment would be good for Germany in terms of growth but also in terms of demand. Higher investment would address the current account surplus, this could be achieved by liberalising the services sector and improving policies that support innovation. This would go in the long-term interests of Germany to have a stronger economy. We certainly do not argue for a less competitive Germany.”

“Risks of deflation may be slowly increasing. The ECB must be very careful and be prepared to use even non-conventional measures to beat any risk of deflation becoming permanent.”

 

German ZEW – Confidence Continues to Grow

The ZEW Indicator of Economic Sentiment for Germany has increased by 1.8 points in November 2013. The indicator now stands at a level of 54.6 points (historical average: 24.1 points), its highest mark since October 2009. “Economic expectations for Germany have been hovering at a high level for months. The slightly improved economic outlook for the Eurozone might have contributed to this development”, says ZEW President Prof. Dr. Clemens Fuest. The assessment of the current economic situation for Germany has slightly worsened in November. The respective indicator has fallen by 1.0 points

 

Census ‘faked 2012 election jobs report

In the final months of the 2012 presidential campaign, from August to September, the unemployment rate in the USA fell sharply. The decline, from 8.1 percent in August to 7.8 percent in September was a massive unexpected positive print. A 0.3% reduction in one month, taking the figure below the psychological 8% barrier, might not have been all it seemed. The numbers, according to a reliable source, were manipulated. And the Census Bureau, which does the unemployment survey, knew it.

 

US Employment Cost Index – September 2013

Compensation costs for civilian workers increased 0.4 percent, seasonally adjusted, for the 3-month period ending September 2013, following a 0.5 percent increase in June, the U.S. Bureau of Labor Statistics reported today. Wages and salaries (which make up about 70 percent of compensation costs) increased 0.3 percent in the September quarter, similar to the 0.4 percent increase for the previous period. Benefits (which make up the remaining 30 percent of compensation) increased 0.7 percent, compared to a 0.4 percent increase for the 3-month period ending in June.

 

Total impasse” in Greece over Troika talks

Over in Greece negotiations between the government and visiting mission troika chiefs representing the country’s creditors at the EU, ECB and IMF appear to be deadlocked. There’s little hope that a deal can be reached in time for the next meeting of eurozone finance ministers in December. A deal is unlikely before the eurogroup meeting on December 9th, the troika still isn’t convinced by Athens’ figures.

 

Market overview

The DJIA closed down 0.06%, having rejected the 16,000 barrier for the second day. The volume or orders for; buy, sell and stop orders at this level must be massive, preventing much direction either way from gathering any fresh momentum. The SPX closed down 0.20% also rejecting the critical psyche level of 1,800. The NASDAQ closed down 0.44%.

European indices also closed in the red; STOXX down 1.04%, the CAC down 1.12%, DAX down 0.35% and UK FTSE down 0.38%.

Looking towards the equity index futures the DJIA is currently down 0.03%, SPX down 0.20% and NASDAQ down 0.25%. European indices futures are also down; STOXX down 1.04%, DAX down 0.38%, CAC down 1.14%, UK FTSE down 0.35%.

NYMEX WTI oil closed up 0.33% at $93.34 per barrel, NYMEX nat gas down 0.79% at $3.56 per therm. COMEX gold closed up on the day by 0.09% at $1273.50 per ounce and silver down 0.13% at $20.33 per ounce.

 

Forex focus

The euro rose by 0.4 percent to 135.57 yen late in New York time after touching 135.71, the strongest level since November 2009. The shared currency gained 0.2 percent to $1.3538 after reaching $1.3547, the strongest level since Nov. 6th. The dollar rose 0.2 percent to 100.14 yen. The U.S. Dollar Index, which monitors the greenback versus its 10 major counterparts, was little changed at 1,015.00 after touching 1,013.11, the lowest since Nov. 6th. The euro rose to a four-year high versus yen after a European Central Bank board member said policy makers must be “very careful” about using negative interest rates in order to counter low inflation.

The loonie, as Canada’s currency is known slid 0.4 percent to C$1.0469 per U.S. dollar at 5 p.m. in Toronto. It gained to C$1.0415 on Monday, the strongest level since Nov. 7th. One Canadian dollar buys 95.52 U.S. cents. Canada’s dollar fell versus most major counterparts as futures of crude oil, the nation’s largest export, touched the lowest level in more than five months.

 

Bonds

U.S. 10-year yields rose four basis points, or 0.04 percentage point, to 2.71 percent as of 5:00 p.m. New York time. Yields fell earlier to 2.66 percent, the least since Nov. 8th. The price of the 2.75 percent note due in November 2023 fell 11/32, or $3.44 per $1,000 face amount, to 100 3/8. Treasuries fell, pushing the yield on the benchmark 10-year note up from a one-week low, before a speech by Federal Reserve Chairman Ben S. Bernanke that may help gauge the outlook for monetary stimulus.

 

Fundamental policy and high impact news events that may affect market sentiment on November 20th.

Wednesday sees the publication of Germany’s PPI, expected in at 0.1% up for the month and the BoE MPC publishes its voting over the current quantitative easing programme and rate setting, expected to have been unanimous. Inflation details for the USA are published, with the CPI expected in up 0.1% on the month, RPI up 0.1% with CPI flat. USA existing home sales are expected in at 5.21 million per annum, a slight fall expected due to seasonal activity slowing down moderately. The FOMC recent meeting minutes are published, prior to that FOMC member Bullard speaks. The governor of Canada’s central bank Poloz speaks, China’s HSBC flash manufacturing index is published, expected in at 50.9, whilst Japan’s monetary policy statement is published as the BOJ conducts a press conference.

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