FOMC and forward guidance....

 

Hat-tip – Ian

 

http://www.telegraph.co.uk/finance/alex/

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MACRO DIGEST: Impasse is the word...

Just touched down in Brazil and I am slightly surprised to see the calm with which the market deals with the US government shut-down. True in the short-term economic impact its damage is limited, but how about the politicians and their inability to reconcile themselves with their voters? 

A stunning 72 pc of Americans oppose the government shut-down, CNN reports that 46 pc will blame the shut down on the Republicans and 36 pc on Obama. Meanwhile 800.000 public employees will be furlonged and an additional 1 million workers will go without pay.

The damage done is hard to quantify as its dependent on how long the shut down is in place, but here is a few estimates:

IHS says one week will cost 0.2 pc of GDP. 21 days will ocst 0.9-1,4 pc of GDP, meanwhile Bank of America Merill says two weeks equate to 0.5 pc and all October will cost 2 pc of GDP.  Basically the price for from 0,2 pc to 2,0 pc which is a lot in an economy which by Wall Street prior to the shut down was on track for less than 1.6 pc growth YoY after 2.5 pc in 2012.

It has been 17 years since the last shut down during the Clinton years and as the bulls like to point out the US economy grew stronger not worse after the shut down, but more importantly it was preceded by a  massive sweep by Newt Gringrich and the Republican party using the the Contract for America to unseat the Democrats - Wikipedia

This led to the President Clinton eating something of a humble pie on the budget having to promise to balance the budget over seven years.

The early 1995 shut down was from November 13th to November 19th. Clinton vetoed a continuing resolution passed by the Republican controlled Congress. A deal was reached allowing for 75 pc funding for four weeks, and Clinton agreed to a seven year timetable for a balanced budget.

This was followed by second shut down from December 16th, 1995 to January 6th 1996 where subsequently the Republicans demanded Clinto propose a budget with a seven year-year time table using the Congressional Budget Office numbers, rather than Clinton's Office of Management and Budget. However Clinton refused. Eventually, Congress and Clinton agreed to pass a compromise budget.

The US economy went on to perform and the Congress at that time worked to keep each other in line, rather than to ruin any attempts to make politics. Much have changed since and to be honest having lived in the US and as someone who have to deal with politicians on a regular basis I am losing faith in this breed of humans calling themselves politicians. They stopped representing their voters long time ago, now is its all Facebook updates with empty statements and pointed fingers.

The first practical impact on the market will be a lack of Non-farm payroll next Friday and then the October 17th debt ceiling limit expiring. The government shut down could merely be an appetizer to the debt ceiling debate but to me, still, the most important thing will be that FOMC will not be able to have any data available to them before we go into 2014 due to distortion, late fillings, refilling and the like. 

Meanwhile our expected trend change in housing and employment is about to start as we enter Q4 today. The increase in noise will make the consumer and corporations more defensive and unlike 1995/96 the US economy is running on empty.

Strategy:

Remain long core fixed income. 2.25% yield(10 Year US government bonds) still likely despite the odd talk of 'default' in the US after October 17th .

The price tag which politicians keeps missing remains:  No real reforms and a potential growth outlook which at best is now at 1.2% for the full year in the US - if that's 'recovery' then I need my school money back.

Steen jakobsen

 

 

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Steen's Chronicle: Pause in asset inflation?

We have taken profit on what we consider the 'tapering re-pricing' which happened last week after the Federal Open Market Committee decided not to start reducing its asset purchases. Now we are looking for a small correction which we will manage by shorting the DAX and the NASDAQ.

Preferred path
Our preferred path from here looks like the chart of the NQ-100 below which we ultimately want to go short big time when this cycle ends in late 2013 or early 2014:

 

_{Source: Bloomberg}

Apprehensive re. next month
We are apprehensive about the coming month due to several factors:

·         The expected fourth wave correction down

·         The seasonal weakness in September/October (see below)

·         Fund managers and pundits who constantly say that Europe is cheap?

The latter is personally what scares me the most - cheap relative to what?

Yesterday, a UK-based manager even tried to convince himself (certainly not me) that Europe has the lowest foreign trade/exposure of any major trading bloc. Where do these people get their information from? Starbucks, perhaps?

_{Source: seasonalcharts.com}

More QE, less growth, less inflation and less upside
Finally, I have mentioned a few times how I see the fourth quarter having a dramatic slow-down effect, mainly due to unemployment rising, but also due to a serious drop in US housing activities. Please see the chart below. It clearly shows not only why housing will fall (correlation with a lag of mortgage rates) but also why we will see more quantitative easing (QE) rather than less.

Tapering will not happen in October or in 2013 for that matter. Not a single economic vector in our model is pointing up. All indicate less growth, less inflation and less upside. The problem? The market is still talking recovery, despite the US this year being barely able to muster 1.5 percent growth after 2.5 percent last year. If this is recovery, I don't want to experience recession.

_{Source: Thomson Reuters}

Non-tapering changed fixed income's relative value over equities
Again, we are increasingly confident about our 2.25 percent 10-year US bond rate call by the end of Q4-2013 versus 2.65 percent now. The Federal Open Market Committee's fixed income put issued by the Fed's recent non-tapering act has changed the relative value of fixed income over equities. This story has only just begun.

Market focus
I remain 80 percent long fixed income in my Beta portfolio (Bunds, US 10-year (IEF ETF) and Danish 1.5 percent 10-year government bonds).

Alpha-wise, increasingly my Gold calls still see 1525/75 before falling again, and finally I continue to play the US dollar short as the path of least resistance will be a lower US dollar to help refuel emerging market currencies.

I am off to Slovakia.

Stay safe,

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

 

Please visit our website at www.saxobank.com

 

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Prepared for collapsing house sales in Q4

The lead/lag of mortgage into house sales is stunning….below our Q4 outlook

 

This work is done in co-operation with my macro partner……

 

Conclusion:  Be long fixed income over equity from now through end of 2014….. I remain 80% long in my beta portfolio…. 2.25% target for Q4 – and retest of old low in yield in 2014. Market is not ready for the dramatic slow-down coming…

 

 

 

 

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

 

Please visit our website at www.saxobank.com

 

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Steen's Chronicle: Merkel may be the Queen of Germany, but she's missing a Prince...

Merkel may be the Queen of Germany, but she's missing a Prince...

 

http://www.tradingfloor.com/posts/merkel-queen-germany-shes-missing-prince-1093286340

The German election was great for Angela Merkel personally, bad for Germany, and bad for reform in Europe and Germany. While there has been no impact on markets in the short-term, the noise and hence the volatility will increase as no one is willing to join Merkel government.

Standing alone: Who will stand with Merkel?                        Source: Handelsblatt

---

Germany is slowing down
Germany is already deaccelerating growth and social tensions are on the rise with the working poor numbering seven million. Add in the emerging market slowdown and you have a cocktail that will start to hurt German exports by the fourth quarter. Being in government is the last place you might want to be as 2014 will see Germany move towards zero growth and in dire need of reforms again. The SPD should stay out of government and it most probably will.

Buit if SPD joins the government in a coalition, the price will be less reforms, not more. EU politics will become less about austerity and more of a Club Med. 

So Merkel is a Queen without a prince and with the DAX and the EURUSD unchanged, the market reaction this morning also reflects this. 

Source: Bloomberg

Horse-trading
With Merkel's victory but subsequent failure to secure a majority, the horse-trading is about to get underway and could in many ways act as a reminder for the talks that dominated the German Federal Election 2005.

Some victories can be costly. Merkel's victory is very much perennial kingmaker FDP's loss. With it banished from the political landscape that the party had occupied since WWII, Merkel is left searching for a coalition partners.

The problem she has here is that the two potential partners - The Green Party and SPD - are both sceptical. SPD is still suffering from having worked with Merkel after former chancellor Gerhard Schröder's political misjudgement in calling an early election in 2005. If it is serious about returning to power in Germany, the party's best strategy would be to form a powerful opposition to Merkel and position its strong grassroots and länder stronghold for the right candidate in 2017.

Presently it seems Hamburg Mayor Olaf Scholz is a name to follow.....

The German newspapers this morning are full of exactly this story: the victory without majority.

"We have experience with the grand coalition, and it's not particularly positive," says North Rhine-Westphalia state premier Hannelore Kraft. "This is an issue that is very difficult in our party."

"The ball is now with Merkel," said SPD General Secretary Andrea Nahles. 

Killing
The SPD's problem in opposition has been that Merkel is more than willing to take its side on SPD causes with the result that she is "killing them" by going left all the time. That highly effective strategy leaves the SPD with no choice in my opinion. Stay strong or disappear.

The party needs to rebuild its confidence and this is better served in opposition than in government. If in doubt, look to the FDP. The FDP is as much part of the "success" of Germany as Merkel, but it is Merkel who has taken all the glory.

But if SPD joins the government, it will insist on strong concessions. The SPD campaigned on social justice issues and help for the working poor, so it would expect a softening of some of its own tough labour reforms from a decade ago and demand a national minimum wage. (Source: Telegraph.co.uk)

On the critical Euro bond issue, SPD tried its hand at openly supporting "more Europe", but its voters reacted so now they are pro with the caveat that its leaders are always stressing that it would mean changing the German Constitution. This link is excellent reading on the SPD's dilemma.

Austerity
The bigger fundamental change should SPD join would be on austerity: Zeit writes: 

"Traditionally, the Socialists are more internationalist-minded than the Union. They would participate in the government but the Merkelsche Austeritätkurs would be terminated."

Whatever government is formed, the underlying economic trend is clear. Germany's victory in the fight against the debt crsis and its self-perception peaked yesterday. From here on in, it's back to work. Merkel will find that the domestic agenda over the next few years will be just as critical as the EU. 

The working poor, the minimum wage, a divided Germany (East vs. West), her party without an heir to her throne, and a Europe where no reforms are still the main driver. And you can add to this that Germany is becoming a hugely expensive place in which to produce due to its energy policy.

The government predicts that the renewable energy surcharge added to every consumer's electricity bill will increase from 5.3 cents today to between 6.2 and 6.5 cents per kilowatt hour. That policy will add 20 percent to the cost of energy this year alone!

German consumers already pay the highest electricity prices in Europe. But because the government is failing to get the costs of its new energy policy under control, rising prices are already on the horizon. Electricity is becoming a luxury good in Germany, and one of the country's most important future-oriented projects is acutely at risk.

Again, when there is an action there is a reaction. Controlling the action is the easy part, the consequences of the reaction is the harder part, as Merkel and German consumers will realise in 2014.

 

 

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

 

Please visit our website at www.saxobank.com

 

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Old ladies vs. drivers & Fed vs. Markets...

Some Friday anology for you…..

YOU HAVE TO LISTEN/SEE this... Incredible...(Hat-tip: Ian Green)

A Fed analogy: The Four Old ladies is the market & the driver is the FED......

Friday finally: So if you are confused and tired and can't believe your own ears and eyes, Let me cheer you up.....

http://www.youtube.com/watch?v=TN8YQVM1GQI

Advices:

#1: Don't run red lights
#2: Don't underestimate old ladies

:-) Nice weekend...

 

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

 

Please visit our website at www.saxobank.com

 

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Macro Digest: Ms. Janet Yellen - The next Fed Chairman a closer look

Dear All,

 

Attached is a deeper portrait of Ms. Janet Yellen – I wish I could take the honor of having written it but… it's my intern Marcus Henglein, Oxford University, who wrote it. I found many new and useful angles on what to expect from Yellen. She is very dovish, Keynesian, but also intellectual honest.

 

She will be a steady pair of hands having work at the Fed since the 1970s but she is likely to be supporting a model, Fed, which is increasingly losing its way, reduced to "talking to the market".

 

Driving to work this morning I had to laugh:  Why is it Fed thinks they can "forward guide" the market? Since when have talk been worth anything?  No, Fed, ECB, and BOE soon will realize it's what you do that matters not what you say and that may prove to be the real problem.

 

Nice week-end

 

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

 

Please visit our website at www.saxobank.com

 

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