Around the Globe 11.05.2013

BOJ Gov. Kuroda Calls Easing Steps Successful –

BOJ Struggles to Convince on 2% as Abenomics Shine Fades – Bloomberg.

Japan Salaries Extend Fall as Abe Urges Companies to Raise Wages – Bloomberg.

Japanese Incomes  Japanese GDP Performance Through 2Q2013

Japanese Inflation Rate


Printapalooza throughout the world continues, but the Bank of Japan is leading the world in money creation.  Printing inflates asset prices while deflating labor costs, i.e. wages.  In the first chart, note the trend of Japanese wages since the BoJ began printing over a decade ago.  It is not surprising that the Japanese economy is weak, because consumers have been on a slow, inexorable wage reduction for almost 15 years.  The current round has proven ineffective at raising GDP growth, as illustrated in our second chart.  Indeed, Japan witnessed stronger growth in the aftermath of Lehman than it is under Abenomics, which is also the last time Japanese inflation exceeded 2%.  If you examine the third chart, you can see what happened after the last three times the mainstream financial press called an end to Japanese deflation.

In the meantime, the export and stock market gains fueled by the weak yen have probably peaked.  The USDJPY exchange rate is highly correlated to the ratio between BoJ and Fed assets.  As our last chart details, the market has already priced in the more rapid expansion of the BoJ’s balance sheet.  A reduction in Fed purchases, the dreaded taper, will allow the yen to depreciate further.

BoJ to Fed Balance Sheet Ratio vs. JPYUSD


Service Industries in U.S. Grow at Faster Pace Than Forecast – Bloomberg.

Service sector exapnds more than expected in October: ISM.

U.S. service sector growth quickens in October: ISM | Reuters.

ISM NMI 11.2013

The economic data continues to tell a tale of stagnation.  The MFP is breathlessly reporting that the services PMI beat the consensus forecast despite the “shutdown.”  Numbers above 50 signal expansion, but a 55.4 is nothing to write home about.  Expected GDP growth at this level is below 2%, which is far below the 3.5% growth required to stir the labor market.

Pressure mounts on Draghi following eurozone forecasts –

Rehn Confident Greece to Meet Targets as Troika Talks Resume – Bloomberg.

EU Forecasts Sluggish Growth as Austerity Continues –

EU cuts euro zone growth forecasts for 2014.

Uncertainty over ECB caps moves in shares, euro | Reuters.

Euro Fair Value at 1.37


Everyone is trying to predict what the ECB will do on Thursday: will it cut rates or not? Most commentators seem to believe that the ECB will cut its discount rate, because the EU just cut its Eurozone growth forecast for 2014 to 1.1%.  The EU has been relentlessly cutting growth forecasts since 2010, so there is no crisis here.  The only thing you need to know about how the ECB will conduct monetary policy is contained in the chart above.

As long as the euro remains weak enough to promote German exports, there will be no rate cut to lower the euro exchange rate.  If the euro attains and maintains the low $1.40’s for a time, then there will be a rate cut.  At the current rate of $1.35, Germany is benefiting from both low inflation and a weak currency.


Around the Globe 10.01.2013

U.S. Factory Activity Shows Surprising Strength –

U.S. ISM Manufacturing Index Rose in September – Bloomberg.

ISM jumps; Construction report likely canceled due to shutdown.

September manufacturing activity highest since April 2011: ISM | Reuters.

ISM PMI 10.2013

The financial press enjoys hyping the various economic indicators but fails to place the results in context.  Rather than viewing each piece of economic data as a component of the big picture, these outlets tend to view each indicator separately.  Markit’s PMI data was released prior to today’s ISM numbers.  Markit revealed a PMI of 52.5, and this was buried in the online editions of all of the outlets above.

When the ISM’s PMI registered at a 56, this news was placed on the homepage of Reuters, Bloomberg, the WSJ and CNBC.  Which number is better? Neither.  The truth is that these numbers confirm the present trend of tepid growth with an increasing chance of a recession going forward.  Companies may be doing well with robust order flow and strong pricing power, but they are not willing to add more workers.  As long as hiring remains slow, economic growth will remain tepid.  As long as economic growth remains tepid, hiring will remain slow.

US Manufacturing Employment PMI 10.2013

Euro-Zone Factory Growth Slows –

Euro zone manufacturing output falls in September.

Eurozone Markit PMI 10.2013

The Eurozone remains in a stagnant state.  The Manufacturing PMI is barely within expansionary territory with a 51.1.  This number represents a small decline from August.  Commentators seem concerned that the Eurozone “expansion” is running out of gas only two months after it began.  This information merely conforms to the actual situation on the ground rather than the recovery narrative.  Growth is not accelerating, which is what used to happen prior to the New Normal, and this change is confusing to the mainstream media.  The story is not the monthly fluctuations of the PMI but rather the overall trend.  What is making this recovery weaker than previous iterations?

China manufacturing tepid in September, small firms struggle | Reuters.

China September HSBC PMI well below flash estimate.

China Sept. Manufacturing Index Rises Less Than Forecast – Bloomberg.

HSBC China PMI 10.2013

People place too much emphasis on the latest data release, but the real story is that Chinese manufacturing has been basically flat since mid-2011.  The economy is still growing by 7.5% a year, and this growth must be coming from somewhere.  Credit creation has been proceeding at a fairly rapid clip, and this is supporting the economy in the short term.  The question in China is the same as for the rest of the large economies:  How long will this loose money policy remain effective?

Lawmakers to Break With Berlusconi –

Bunga Bunga

Bunga Bunga

It seems as if Letta’s government will live to fight another day.  PDL lawmakers rightly fear that voters will blame them for plunging the country into chaos.  The problem is that even though this government will survive it is too weak to create and implement the necessary reforms to Italy’s political, economic and financial systems to spur growth.  While there will not be an immediate crisis, eventually the consequences of past behavior will catch up to Italy, but it won’t be today.  The country will continue muddling along until one day it doesn’t.