Macro Digest: ECB is about to do biggest policy mistake in its history & FED is 1-1 on dual mandate

FOMC has a dual mandate: Employment & inflation. On employment they seem to be doing well, on the inflation less so:

This is non-farm with 12-mth average – US has created just north of 200K job on average in this "non-lift-off" business cycle, but looking at employment to population the US has gone NOWHERE since 2010. Call it a success, but then on inflation:

 

 

 

Whether measured and projected against 5Y5Y forward or 5Yr break-even the incoming "alert" is that US inflation will come off further, and hence far away from its intended 2% PCE target. The actual mandate reads:

 

 

 

So….. why this e-mail? Well similar to Europe, the 2015 projection of expected return will be driven by whether market takes the "success" of the labor market as being more significant than the "failure" on inflation / dis-inflation. As stated in my latest Steen's Chronicle I think it's the dis-inflation/undershooting of inflation which will be the main driver, and as such negate the positive input to disposable income from lower energy….in other words inflation expectations will bottom in Q1 EXACTLY when ECB is most likely to ignite their too late, too desperate move to full QE.

 

I firmly believe European growth will come back in H2-2015 and strongly so: A combination of easier monetary policy, lower energy, lower EUR will add up to significant boost to spending and investments 9-month from now, co-inciding with weaker stock markets as money will be moved from non-productive paper investment in the 20% of economy into the 80% (SME's) ending in capacity and industrialization of mainly PIIGS and Eastern Europe. The biggest play in 2015 will be finding the entry point for long Emerging Europe: Polen, Bulgaria, Romania, Hungary and Czech. Fact is production is coming back to the mentioned names as seen here in difference between German and Hungarian Industrial Production. Micro prevails – again!

 

 

 

This is how the JABA model sees 2015 – low in Q1/Q2 follow by 9-month rule impulse from low rates….

 

 

Note the LOW in early 2015 is REPLACED by recovery in H2. The ECB is about to make the biggest timing and policy mistake in its history – instead they should continue to do what they do best: Nothing….keep talking doing nothing.. the economy heals through supply side and micro, not macro.

 

Safe travels,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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