I have a large backlog of things to write about from the last few days, having not produced a note, but I have decided just to leave them. There are only so many hours in a day! But I thought I would list the highlights.

  • BoJ didn’t add to stimulus. Its balance sheet has hardly expanded.
  • UK coalition is looking at “using its balance sheet” to do more infrastructure investment. I presume this means guarantees for private-sector debt combined with PFI schemes. As such, it is just off-balance-sheet financing for fiscal stimulus — which is a lot better than not stimulus at all. Government infrastructure spending is presently falling in the UK, which is insane in a country with negative real interest rates.
  • Europeans agreed to tell the Commission to come up with a route towards fiscal coordination and Eurozone bonds. Merkel insists the former must come first, but other countries disagree. Bear in mind that the SPD has supported Eurozone bonds which means that German could be only one election away from a change of position. The CDU’s poll lead is down to 2 points.
  • China said “fine tuning” of policy would intensify. It seems that the decision to move towards stimulus has been taken. On the other hand, China may well have slowed more than the government intended or than the market expected in Q1. The picture is murky as usual. The obvious trade if China is on an upward track is to buy AUD, but in Australia the latest monetary policy minutes were doveish and AUD will probably remain in risk-off mode while the Greek situation remains unresolved.

Chinese RRR Cuts

On the subject of China, FT Alphaville has the view that the bank reserve ratio cuts of the past few months will merely have offset the decline in capital inflows implied by the narrowing of the current-account surplus. This suggests that monetary conditions have, at best, remained neutral over that time.

I am partially convinced by this; but I cannot see that this argument means that bigger cuts in reserve requirements would not be stimulative. I suppose the point is that we cannot infer from the recent cuts that China is moving monetary policy to an easing bias. On the other hand, from the government’s recent statements, it sounds like fiscal stimulus is on the way, in the form of infrastructure spending and environmental-protection and rural projects.


UK GDP for Q1 was revised down to -0.3% QOQ, but preliminary business investment showed the first positive number since Q1 of 2010, at +3.6%. UK real interest rates turned negative last year and are now the lowest of any major economy (as implied by 10-year linkers). This ought to promote investment spending, other things being equal. It would be an interesting result if, by increasing inflation expectations (and thereby depressing real interest rates) central banks could promote economic activity: it would be a vindication of those calling for a higher inflation targets or a different target for central banks (such as nominal GDP).

European Goings-On

Markets started the week with an upward move this morning on account of the latest batch of six Greek opinion polls, published on Saturday, which showed ND ahead of SYRIZA by 0.5-5.7%. Taken together, they suggested that ND and PASOK were getting to the kind of territory where they might be able to form a majority coalition in the next parliament. This suggests that all the hysterical talk about euro exit is having an effect. Perhaps the EU’s usual response to democracy — if you get the wrong answer, ask again — is going to work once more.

Talking of travesties of democracy, the Irish are holding a referendum on the EU’s fiscal compact this week. As a reminder, this is the agreement that entrenches austerity as the response to economic crises for evermore. The normal practice has been for the Irish to vote “No” in EU referenda and to be asked again, amid hysterics from the leaders of other European countries and various commissioners, at which point they vote “Yes”. On this occasion, however, the hysterics have been built in from the start, inasmuch as Ireland has to agree to the treaty in order to qualify for aid from the ESM — which it may well need if it is unable to return to the bond markets next year (as planned).


Egypt is to have a presidential run-off between the Muslim Brotherhood’s Mohamed Morsi and Ahmed Shafiq, a former minister under Hosni Mubarak. Neither mustered over 25% in the first round, so there is everything to play for. One assumes that Egyptians will vote against the former regime and therefore pick Morsi (and hence, despite the secular nature of the revolution, will end up with an Islamist president). Egyptian equities are up 25% from their bottom at the end of 2011, and their Bloomberg forward P/E has risen from around 6x to around 9x. I wonder whether a knee-jerk sell-off by foreign holders in response to a Morsi victory might offer a buying opportunity.


  • US durable goods orders 0.2% d.e. Apr. Core -0.6% d.e.
  • US initial claims 370k a.e.
  • US flash PMI 53.9 (I have never seen this before — is it a new release?)
  • Tokyo core CPI -0.8% d.e. May.
  • Japan national core CPI 0.2% b.e. May.
  • German GfK consumer climate 5.7 a.e.
  • Revised Michigan sentiment 79.3 b.e. A new post-crisis high.

This Week

  • US CB consumer confidence (Tue)
  • Australia retail sales (Wed)
  • Italy 10-year bond auction (Wed)
  • US pending home sales (Wed)
  • Australia building approvals (Thu)
  • Australia private capex (Thu)
  • Irish treaty vote (Thu)
  • US ADP payrolls (Thu)
  • US prelim GDP (Thu)
  • US initial claims (Thu)
  • Global PMI’s (Fri)
  • US non-farm payrolls (Fri)
  • US Personal Income and Outlays Report (Fri)