On the Future

I wrote in my notebook this morning, “the future is unusually unclear –” What I had in mind was the fact that I am finding it hard to make a big-picture call. This time last year, I thought that a general tightening of policy in the US — in the form of the end of QE and a growing trend towards fiscal tightening — would damage equity markets there, while the ECB would be forced to reverse its policy of interest-rate cuts and the EUR would therefore fall. These calls turned out to be right. Now, however, the picture is very different. The ECB has cut rates as far as it is prepared to for now and has shown a willingness to rescue both banks and sovereigns, if it really has to; while the Fed seems to have found a monetary-policy formula that actually keeps rates low at the long end even as economic prospects improve. The big difference between this year and last, I suppose, is that last year it was reasonable to bet on the authorities cocking everything up. This year, the reasonable bet seems to be on them getting things right. “Everything will be OK,” being the default assumption of the equity market, doesn’t feel like a big call.

So, after thinking for a moment, I continued my note: “– or is it just uninteresting? Europe will have a recession; the US will not and slow growth will continue; China will loosen some time and growth will take off again.” True, European policy-makers will continue to cock things up for the European economy as long as austerity remains the fashion. Their attempt to achieve a relative adjustment in competitiveness between the core and the periphery via nominal wage deflation in the periphery is just not going to work. But even there, the solution to which the Europeans are impelled by the system they built for themselves — a degree of fiscal union, higher inflation in Germany — is becoming clear (I am tempted to a ghastly paraphrasing of Nietzsche: “[The inevitable fiscal union] is still on its way, still wandering; it has not yet reached the ears of [the CDU]. Lightning and thunder require time; the light of the stars requires time; deeds, though done, still require time to be seen and heard. This deed is still more distant from them than most distant stars — and yet they have done it themselves.” http://bit.ly/IyAQza).

And if you don’t have a big bearish call, but see continued improvement, the thing to do is probably to go long. Market economies, after all, seem to have an inherent tendency to grow.


At the IMF meeting over the weekend, countries agreed to put up an extra $430bn in lending capacity for the fund. EM pushed for more power in the IMF as a quid pro quo (I believe the US only needs to ratify a previous agreement for Brazil, for example, to gain better representation). One assumes that this money would be available to the Eurozone, but it is likely that Eurozone countries would have to take significant measures themselves before any IMF loans were doled out.

The first round of the French presidential election took place over the weekend, and the results were Hollande 28.5, Sarkozy 27.1, Le Pen 18.1. A BVA poll of National Front supporters saw 57% switching to Sarkozy, 23% abstaining and 20% switching to Hollande, but a CSA poll taken after the result had Hollande leading Sarkozy 56-44, which means that Hollande is likely to win the run-off on 6th May on a combination of National Front, left-wing and centrist votes. The markets are fretting, as it their wont, about the election of a socialist candidate, but I think there is little cause for worry. A Hollande victory would hardly be the Russian Revolution: France is already a social-democratic country with a strong welfare state and Hollande has historically been known as a centrist, according to The Economist. His fiscal plans would see the deficit eliminated a year later than Sarkozy had intended which, given the depressive effect of austerity on an already-depressed economy, is probably a good thing. His opposition to the fiscal compact could be serious — after all, who knows in politics — but the French socialists, and especially those around Hollande, are strongly Europhile and unlikely to rock the boat too much. The Economist suggested that Hollande has moved closer to Merkel on this score in any case. It may be that Mr. Hollande is more inclined to fight the austerity fad than his predecessor, but given that austerity is not going to work, a bit of push-back would be a very good thing.

In blow for sanity, the Dutch government collapsed over the weekend after the Freedom Party said it was not in the country’s interest to stick to the fiscal compact’s 3% deficit limit. It is right, of course, although its departure and the consequent difficulty of passing a budget could make the Netherlands a new source of market nervousness.

Banking Fears?

Is the current risk-off episode really about the health of Spanish banks? If so surely all Eurozone banks should be affected. But in fact, while the BBB credit spread has widened as equities have weakened in the past couple of weeks, the EURIBOR-EONIA spread remained flat and even narrowed a little on Friday. What does this tell us? Perhaps that the present risk-off episode is more about a Europe-focused growth scare than renewed fears about a sovereign default or bank collapse?


  • HSBC China flash PMI rose from 48.3 to 49.1; market was disappointed to see continued contraction, although since the authorities have yet to loosen policy, it was hardly surprising.
  • Eurozone flash PMI 46 d.e. and fell. Services PMI 47.9 d.e. and fell.

This Week

  • Australia CPI (Tue)
  • UK public sector borrowing (Tue)
  • Case-Shiller (Tue)
  • New Home Sales (Tue)
  • UK prelim. GDP (Wed)
  • Durable goods orders (Wed)
  • FOMC rate, statement and press conference (Wed)
  • Pending home sales (Thu)
  • Rash of Japanese date: HH spending, CPI, IP, RS and BoJ rate (Fri)
  • Advance GDP Q1 (Fri)