Macro Digest: Thoughts from the Hammock....US is slowing not accelerating - and Italy the real risk in Europe?

A few very interesting chart from the Hammock collection………

 

Today @ 1610 we have Fed Chairman speaking on "The first 100 years of the Federal Reserve" ……and before that the FOMC Minutes – both should confirm what we know: Fed is almost desperate to normalize, but more to the point – It's rare I will say this but I think most people and certainly pundits get the bigger macro themes correct:

 

Here is a few consensus calls and my take:

 

1.      Growth is picking up in the US and H2 will see acceleration -  Look below chart on consumer side, which have stabilized but hardly flying. Look at Citigroup Surprise Index and its below 100 SMA and negative!

2.      Interest rate move is about Fed petering – No, it's re-calibrating risk and VaR models – next move is driven by current account trends (Asia will not invest in US and Europe) and normalization of Fed policy as regulatory capital is increased dramatically (See Margin call)

3.      Low inflation is temporary – No, it's structural. The low inflation in the US which Fed is not acting on is reflection of #1  - a weak economy caught in debt trap.

4.      Club Med countries seeing significant improvement (that's the general talk among EU and Troika members) but…. Italy primary surplus will drop this year, right now government is 11 bln EUR short on lacking VAT and real estate levy. Greece is not compliant but promising to be be in the future. Ireland is in recession, Portugal is about to change government (despite assurances to the opposite), and finally Cyprus is now in permanent state of "capital restrictions" – meanwhile Ms. Merkel is buying time through the German election on September 22^nd only to find Q4 looks nasty as the non-action on the above will make it a difficult Christmas for her and Europe at large.

 

 

 

 

 

So why not have a close look at the US economy and the perceived September "petering" ?

 

Well, facts would say it should NOT happen, but as I have written again and again, this is not "normal times" as FED is destined to move towards "normalization" unless market gets more realistic and less bubbly – The Fed normalization will happen despite the chart below – which is the Household debt / Personal Income – i.e.: The ability to service debt considering your level of income – The chart speaks for itself and a big hat tip to Bloomberg Brief for "inspiring" this chart to me..

 

 

This is in many ways a stunning chart – first observe the massive "consumer economy" which happened in the 2000s – from less than 75% to more than 100% consumed/spend! Wow – then the small deleveraging which have taken us from in excess of 110% to 94% now – an expected further deleveraging will take the number to less than 90% indicating that 2.5% long-term growth is far away.

 

Also note that H1-2013 is on track for 1.7% - our leading indicators for H2 indicates….. +1.7% so a 1.7% YoY growth after hitting 2.2% - the economic recovery – Where? How? When?`

 

Finally, don't forget debt ceiling is coming up again against hard backline of September 1^st, meanwhile the immigration law is EVERYTHING on the Hill – expect these two to be intertwined ……unfortunately….

 

Then…. The real risk in Europe? Portugal? Or could it be Italy?

 

S&P downgrades brings them in line but the overall message is clear:  Primary surplus is collapsing as government tries to fade the real estate levy and VAT increases leaving budget 11 bln. EUR short – a meanwhile tax proceed tanks and growth is now expected coming at minus 1.7%.... (They wish!)

 

I have shorted both BTP and MIB40 here…

 

 

 

Source: Bloomberg LLP & Saxo Bank A/S

 

 

 

Source: Bloomberg LLP & Saxo Bank A/S

 

 

 

Source: Bloomberg LLP & Saxo Bank A/S

 

 

 

Safe travels,

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

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